Financial And Capital Markets

The Financial And Capital Markets

Capital markets have maintained their broad recovery; but price action seems to be outpacing sentiment. US equities have recovered nearly 20 percent since hitting their decade lows over a month and a half ago; physical commodities have reversed course after months of basing; and risk premiums in debt and derivative markets have shrank. However, despite these improvements, positive growth is still a distant hope and financial uncertainties still very real threats. Policy officials, economists and traders unanimously forecast an eventual recovery in global expansion sometime either later this year or through the first half of 2010. However, whereas politicians and academics can afford to have a long-term outlook, market participants cannot. An ongoing recession dampens rates of return, stifles capital investment and puts the breaks on production. Altogether, the economic hardship is the fuel for a bear market – so how stable is this ‘market recovery?’

 

A Closer Look At Market Conditions

Over the past week, capital markets struggled to keep the momentum behind the developing rebound from late February lows. The Dow has struggled to keep its pace following its push through 8,000 as last week’s drop in liquidity preceded the start of earnings’ season. With most economic parties forecasting a sharper pace of contraction through the first quarter (not much of a stretch considering the horrible monthly data that has crossed the wires), investors are looking for see how revenues fared. This could act as justification or a contradiction to the fragile rebound in investor optimism. Commodities have responded with greater caution with demand wholly in flux.

In gauging the health of the markets, we have to balance the health of risk and return. For a genuine recovery to develop, investors need to see real evidence for a returns to grow and encourage competition amongst investment classes; and they have to be able to comfortably assume there are no major threats to the normal functioning of the markets. In the recent rebound in price action we have been seeing, the development has been completely on the side of risk. It has been months since a major bank or industry has teetered on the edge of collapse (and threatened the credit market), which is allowing for equity in the absence of panic. Without growth, though, this advance may fail.