Global equity markets have been in a tailspin over the past week, led by the developed markets and the emerging markets following suit. The seemingly complacent view of the world economy having put the recession behind has been shaken, and how!! Question marks have begun to emerge on the sustainability of the economic recovery, especially given the fact some central banks across the globe have now started thinking of measures of withdrawing the stimuli infused in 2008.
And that is precisely where the problem lies. The seemingly strong "recovery" in financial markets from March 2009 to present has been fuelled by a gush of liquidity from central banks. The concerted actions by global central banks helped avert a total collapse in the global economy, but might have laid the foundation for the next shake up. Noted investment stalwarts like George Soros and economists like Nouriel Roubini dubbed " Dr Doom" for his prediction of the global crisis of 2007 have said global financial markets have run up too much too soon. What is remarkable about the rally is almost all asset classes most notably commodities, equities and foreign exchange have all run up at the same time. Seldom is this kind of run sustainable.
News on the economic front though better than earlier, is far from making a person ga-ga. Authorities in the US reportedly seized 9 banks in a single day on October 31st, the most since the crisis began in 2007. The US economic system still seems to be struggling if macro numbers are anything to go by. Unemployment remains high, the housing market still suffers from a huge inventory hangover, foreclosures remain at stratospherically high levels. In fact it is now being said the next wave of foreclosures could be in prime loans, a scenario likely to fan out in 2010.
What next for the stock markets now? Technical analysis already suggests this is just the beginning of a major fall, not the major fall. I would not be surprised if most of the stock markets retrace a major portion of the gains made over the past six months. Stock markets like most other asset classes now look like a sell on rallies rather than a buy on dips. The US Dollar, which has been beaten down massively while most asset classes have rallied gives a feeling of deja vu as in January 2008, a big rally could be underway in the greenback. Though the rally might have just begun, the next leg of the move is likely to come as Dollar bears scramble to cover their shorts.
We are at interesting crossroads, remains to be seen how markets behave from here. For me personally, its the defensive approach. Sell stocks move into cash and wait for better entry levels. Though i guess entry levels are about 6 months away atleast, i continue to watch market movements with a great deal of intrigue.
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