G-20 Actions Applauded by Market

April 2, 2009

Today’s summit of G-20 leaders in London had hung over financial markets throughout March.  Expectations of what might get accomplished had diminished late in that month amid publicly aired disputes over the need for additional fiscal stimulus on a national level, how tightly to regulate, the pros and cons of quantitative monetary easing, and whether surplus or deficit nations bear most responsibility for the world economic crisis.  Some of those disagreements were not resolved.  Yet on a day that saw the ECB cut rates by less than expected and U.S. continuing jobless claims surpass 5.725 million for a gain of 953K in just seven weeks, global financial markets behaved in such as way that can only be interpreted as two thumbs up to what the summit accomplished.

  • Stock markets advanced sharply: Dax +6.1%, Nikkei +4.4%, Ftse +4.3%, and S&P 500 +2.9%.
  • Oil leaped over 8%.
  • Gold, a barometer of risk aversion, settled back 2.4% to less than $910.
  • Ten-year Treasury yields went up 11 basis points.
  • The dollar and yen fell, while the euro and commodity-sensitive currencies rose in another sign of less risk aversion.

The statement released by the Group of Twenty leaders allocated $1.1 trillion of extra funds to bolster resources of international organizations and to promote trade.  It also repeated numerous broad pledges and adopted the French and German tough love stance on regulating the financial industry by, among other things, creating oversight for large hedge funds, sanctioning tax havens, and establishing rules governing bonuses.  The claim is made that fiscal reflation will collectively exceed $5 trillion and create incremental growth of 4%, and the statement endorsed an IMF projection that world growth would reach positive 2% by the end of next year.  The statement takes the view that all nations — rich and poor, surplus and deficit, advanced and emerging — either hang together to get the task done or get hanged separately.

I’m concerned that key tensions were not hashed out.  I do not see a plan to rotate domestic demand growth in favor of the surplus countries and away from those now in deficit.  I see no reason to be more confident today than yesterday that the United States will return to a path of sustainable growth with price stability and fiscal support that is strong enough and well-enough focused to counter the present hole in private demand yet sufficiently reversible to avoid permanent fiscal problems as now saddle Japan.  I am no more confident that Japan will return to its former strength, which must happen to avert a fiscal meltdown.

Markets have been lurching up and down for over a year and half.  One thing most people agree on is that this is a time of unprecedented economic problems, and unconventional solutions are being tried.  Whether such efforts are a panacea or a road to hell as the leader of the Czech Republic recently proclaimed is really not known.  Markets want to believe in happy endings but scare quickly and run.  It’s better that markets reacted well on this day of the summit than had they sold off.  But market convictions will continue to be fickle, and today’s hopeful mood could vanish soon.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.