THE leaders of the world’s 20 biggest economies announced a clutch of
big-ticket measures to breathe life into the world economy, battered by
the sharpest downturn since the Great Depression. The G-20 leaders
agreed to pump in $1.1 trillion of extra financing to support the
International Monetary Fund (IMF) and lubricate world trade.
The main chunk of this consists of $750 billion of extra financing for the IMF. The leaders of the world’s big economies also said they would commit $250 billion to enhance trade flows. The meeting, attended by leaders of emerging market giants India, China and Brazil, also pledged to fight protectionism and exercise stronger regulation of hedge funds and tax havens.
The IMF support consists of $500 billion of direct funding and a $250-billion issuance of special drawing rights, the synthetic currency apportioned to the fund’s members. This will help the fund support countries in financial distress. The $250 billion intended to revive trade flows will largely be in the form of guarantees. The move does not amount to an immediate injection of direct funding into the world economy, which was opposed by deficit-wary European powers, France and Germany.
US markets responded enthusiastically to the appearance of vigorous government action coming out of the G-20. Earlier in the day, markets surged world-wide amid growing signs that the green shoots of global recovery were making their first, hesitant appearance. The S&P 500 was 4.04% higher while the Dow rose 3.9% at the time of writing. The G-20 announcement is only the latest in a trickle of good news from the world’s big economies. US March auto sales rebounded from a 27-year low. In the UK, house prices firmed up in March for the first time in 18 months. The cost of insuring European corporate debt from default fell for the first time this week. And in China, manufacturing expanded for the first time in six months, as the government’s 4-trillion yuan ($585 billion) stimulus package appeared to be taking hold. Bulls also appeared to have been fired up by US treasury secretary Timothy Geithner’s remarks to a foreign business channel about “encouraging signs” in financial markets.
Markets were further enthused by a move that could boost the profitability of US banks. The Financial Accounting Standards Board of the US relaxed fair-value rules, which allow companies to exercise “significant” judgement while valuing the price of some investments on their books, including mortgage-backed securities.
Key markets in Asia surged 3-7% while major markets in Europe were up 3-5%. The 30-share Sensex rose 446.84 points, or 4.5%, to close at 10,348.83, its highest level in nearly five months.
Foreign and local institutions were big buyers
THE 50-share NSE Nifty leapt 150.75 points, or 5%, to close at 3,211.05, its highest close in nearly five-and-a-half months. Both foreign and local institutions were big buyers; overseas investors mopped up shares worth Rs 692 crore and domestic players Rs 254 crore.
However, despite the optimism, the path ahead at home and abroad may be far from smooth. The European Central Bank (ECB) cut its benchmark interest rate by a quarter point to 1.25%, even as the recession in euroarea economy appeared to be deepening. The cut in interest rate was lower than what most economists were expecting. In the US, unemployment rose to a record 669,000 for the week ended March 28, indicating that it could be a while before any recovery in the world’s largest economy is felt by the labour market.
Back home, there’s intense speculation whether the rally will be able to keep its momentum. “The road to recovery is fraught with corrections, but the broad trend is clearly upward,” said Pathik Gandotra, managing director and head of research, IDFC-SSKI, referring to the pickup in auto and cement sales in the past couple of months.
Mr Gandotra said pessimism has been overdone, and the market is likely to be “re-rated”. He expects government spending post-elections and falling cost of capital to be the key drivers of a broad-based recovery, which could set in by October this year.
“Earnings growth for FY10 is likely to be flat (year-on-year), but the market will be willing to give a higher (earnings) multiple, anticipating the recovery ahead,” he said.
But there are others who feel the current upswing could be nothing more than a bear market rally. “This rally is driven by the perception that fundamentals are improving in the global economy and Indian markets are also moving more or less in tandem,” said Rajagopal A, MD & head-global capital markets, India, UBS Securities India. “However, for the rally to sustain, there has to be more evidence that the economic situation globally has definitely turned the corner—that’s not the case yet. At the moment, we still remain exposed to many negative surprises globally,” he added.
Traded turnover on both exchanges combined was around Rs 75,000 crore, indicating that many fencesitters were slowly entering the fray. Brokers say some of the prominent market operators, who were heavily short on the market, have squared up most of their positions, and taken up trading positions on the long side.
Real estate shares were the star performers of the day, with the BSE Realty index climbing 9%. Banking, capital goods and banking were the other strong performers. Dealers expect real estate, metal and banking shares to be volatile in the short term, as the outlook on all three sectors remains uncertain.
Markets were enthused by the fact that car sales in March were higher than a year ago while commercial vehicles were significantly up in March compared to February. On the other hand, both exports and imports collapsed in February.
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