Despite the continuing bad news about earnings, the global economy and rising levels of jobless, markets here and in most major economies are likely to start a major rally this week, providing a couple of conditions are met.
They are, firstly that the Obama stimulus package makes fairly rapid progress through the US Congress now there seems to be some sort of Senate agreement and secondly, that revamp of the banking bailout package, is seen to be credible.
Announcement of the banking bailout package has been postponed a day to allow tonight’s Senate vote on the overall stimulus package to happen without any distraction.
The US Treasury revealed the day’s delay early Monday morning, Australian time.
If both happen, then the tentative rebound which surfaced midway through last week could very well accelerate, dragging commodities and equities sharply higher, in the face of a continuing poor quality flow of news and official figures.
That hesitant rebound has come despite more big losses from Japanese companies, led by Toyota with a loss of over $7 billion estimated for the year to March; a further fall in consumer credit in the US for a record third month in a row; falling factory orders in the US, Asia and Europe and of course another terrible monthly jobs report from the US on Friday with 598,000 jobs going and almost 3.7 million since December 2007.
In fact Friday saw not only the US job figures (the worst in 34 years) but also German industrial output slump to its worst level since unification almost 20 years ago.
UK manufacturing production dropped 2.2% in December, and personal insolvencies increased in the fourth quarter as the recession deepened. The fall in industrial production in Germany was the biggest in almost 18 years.
It’s further confirmation Europe’s biggest economy is the most wounded from the slump, apart from the UK.
But markets across the globe, but especially in the US and Europe turned upwards, despite the continuing flow of adverse news.
Spurred by seemingly better news on the bank bailout and the stimulus packages in the US, investors want to see a rebound, it would seem.
Copper and several other commodities edged higher as well before a sharp jump at the end of last week.
Copper jumped more than 8% on Friday for instance and is now up 15% this year so far.
On top of this was a series of reports on manufacturing and service sectors for a number of economies which suggested that the sharp falls in December has tapered off in January.
Activity was still very weak, but the headlong falls (in areas like orders and exports) seemingly had slowed. Only the jobs outlook in the surveys was still weakening.
And there’s growing signs that, despite rising bond yields in the US (the 10 year yield hit 2.98% Friday), the so-called spreads between different types of debt, government and private and different markets, are still narrowing, indicating easing pressures in credit markets.
Corporate bond issuances last month were at the highest for months and US corporate debt markers are re-opening independent of the Federal reserve’s central facility for commercial paper.
In Australia our banks have issued over $4 billion in new bonds and other securities domestically in the past few months.
Australian companies are raising billions of dollars from share market investors who are buying the placements to lock in future profits because the dividend yields are so high (even taking into account, cuts to payouts).
The MSCI’s all-country world stock index, boosted by Wall Street, Europe and Asia, enjoyed its seventh positive session in the past 10 trading days.
The index is trading in a range above the trough it hit last November, and despite a down month in January, it has not re-traced to that low.
But some analysts issue a caution or two: the worsening jobs figures, especially in the US, point to more pressures on US banks and their huge collection of debts.
So-called AltA mortgages, which sit between prime rated loans and subprime loans, are now turning toxic and defaulting at rates faster than some subprime securities. Credit card debt is going to worsen significantly as well.
Analysts point out there’s some similarity now to last October in the belief that the collapse of Lehman Brothers and other financial pressures would produce a bailout package that would steady things.
Nothing of the sort happened as the package stumbled and economies in the US, Europe, Japan, Taiwan, South Korea, Singapore, the UK and Canada tanked sharply.
Several stimulus packages later in Asia, Europe, Australia and other economies, plus a ground breaking US election, and we are in deeper trouble than back in October.
Many investors it would seem, are sick of falling share prices and other negative news (aren’t we all) and just want to have a rally.
Friday’s rally in the US was unreal if you think about: shares rise in the expectation that the worst jobs figures for more than three decades will see a couple of stimulus and bailout packages passed, justifying a rebound, when all they are doing is confirming the extent of the terrible economic stresses still gripping the US.
By the way, 1.8 million jobs have vanished in the US since October, the US economy, Germany (Europe this week), Japan, South Korea and a host of other countries, have all seen economic growth contract sharply in both the December quarter and in the month of December.
The stimulus package was boosted by ambitious Democrats to nearly $US1 trillion, but narky Republicans (who refuse to accept their role in the problems), have forced it back to just $US712 billion. That is what it was two months ago, and aro
