Market calm may be short-lived
LAST week, global equity investors got a much-needed reprieve from volatile, loss-inflicting markets. But rather than signaling the start of a calmer market phase, this may well prove a prelude to renewedvolatility in the weeks ahead. After ending the last trading session of the previous week with a gain, global stocks got off to a good start last Monday. U.S. markets went on to post their best weekly performance since November, as two days of solid market rallies were followed by relatively calm consolidation. Markets in Japan and some parts of Europe did even better, registering gains of 5 percent to 7 percent. The Fed Lifts Off There were four reasons for this respite from an otherwise horrid start to the year: Attempts by central bankers, especially outside the U.S., to reassure markets; stepped-up negotiations among oil producers aimed at stabilizing prices; the rush by European banks to avoid joining the set of unhinged market segments by coming up with measures including repurchases of their securities; and some, albeit limited, positive U.S. economic news. Yet none of these factors serve to significantly counter, let alone, overcome three much bigger and more consequential realities. First, corporate earnings will be further challenged by continued signs of spreading global economic weakness and a persistent inability by governments to deliver the required policy responses. Last week, the Organization for Economic Cooperation and Development joined other international economic watchdogs in offering lower growth forecasts. It also noted additional risks.
Second, the continued ability of central banks to repress financial volatility is increasingly in doubt. The institutions that are willing to pursue such policies, particularly in China and Japan, are facing questions about their effectiveness. And more able central banks, such as the Federal Reserve, may not be as willing to do so, particularly given economic indicators suggesting that financial volatility has not contaminated economic activity and that wage and price inflation are starting to pick up. Third, although a few days of market gains can force traders to cover their shorts, in this case, it does not seem to have triggered the return of the stabilizing role of long-term capital. Instead, it would appear from data about the flow of funds that markets still need to reprice considerably lower to find the anchoring inflow of significant patient capital. Until these three factors change, occasional periods of market calm -- and, thankfully, there will be some -- are likely to prove frustratingly short.