Stocks, Bonds in ‘Sweet Spot’ as G-20 Avoids Exit (Update2)
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By Simon Kennedy
Sept. 4 (Bloomberg) -- Economic policy makers are signaling they plan to leave emergency stimulus in place even as the global economy pulls out of recession, delivering what Credit Suisse Group AG and Bank of America Corp. call a “sweet spot” for financial markets.
U.S. Treasury Secretary Timothy Geithner and European Central Bank President Jean-Claude Trichet are among Group of 20 finance officials gathering in London today who say it’s too soon to declare victory over the deepest recession since World War II. While data this week confirmed the slump is easing, policy makers are unwilling to curb spending or start unwinding their record low interest rates and debt purchases.
That means stocks will benefit as growth picks up and bonds will be helped by central bankers’ reluctance to lift borrowing costs, say economists at Credit Suisse and Bank of America. The MSCI World Index of stocks has gained 55 percent since reaching a 14-year low on March 9. The Merrill Lynch & Co. Global Sovereign Broad Market Plus Index shows government debt yields are the lowest since April.
“Financial markets will probably remain in this sweet spot for some time,” said Riccardo Barbieri, London-based head of international economics at Banc of America Securities-Merrill Lynch. “While the economic data have almost uniformly surprised on the upside, the leading central banks have credibly signaled to the markets that monetary conditions are set to remain extremely accommodative.”
‘Bumpy Road’
Underscoring what Trichet yesterday called a “bumpy road ahead,” the Standard & Poor’s 500 Index recorded its longest losing streak since May this week and Europe’s Dow Jones Stoxx 600 Index also slid. The MSCI World Index was little changed at 1,066.59 as of 8:30 a.m. in London.
“There is certainly more upside to go though you’ll have to be patient,” said Max King, a London-based strategist at Investec Asset Management, which has about $55 billion. Stocks could rise 25 percent by the end of next year, he said.
The G-20 officials meet through tomorrow to set an agenda for a Pittsburgh summit of leaders in three weeks.
Central bankers are staying cautious as weak hiring and bank lending threaten their economies. Trichet said today in Frankfurt that “it would be premature to declare the crisis over.” The ECB yesterday left its benchmark rate at a record low 1 percent and decided to keep handing as much cash as banks want for up to year at that rate.
Cutting Jobs
U.S. Federal Reserve policy makers last month discussed extending the end date of agency and mortgage-backed bond programs, while keeping rates near zero. Employers in the U.S. probably cut another 230,000 jobs in August and the jobless rate increased, economists said before a report today.
Even as German Finance Minister Peer Steinbrueck presses his G-20 colleagues to devise an exit strategy to unwind the $2 trillion they’ve committed in fiscal stimulus, Geithner and his British counterpart, Alistair Darling, are among those saying now is only the time to craft a plan rather than implement it.
“Getting the timing right is essential, but we have to be acutely aware of just how fragile the international economy is,” Australian Treasurer Wayne Swan said yesterday in London. “I don’t sense that anybody thinks that the time is near” for stimulus to be withdrawn.
The refusal to rush for the exit should keep long-term bond yields low even as the recovery helps equities, said Henry Mo, an economist at Credit Suisse in New York. “This environment will be good for interest rates and corporates and we expect it to continue,” he said.
Outlining Exit
The G-20 should still begin outlining how they plan to reverse their measures when growth takes hold, said Jorgen Elmeskov, acting chief economist at the Paris-based Organization for Economic Cooperation and Development.
“Explaining the exit on the monetary side would anchor inflation expectations and on the fiscal side it would preserve confidence in bond markets,” he said in an interview.
The OECD yesterday cut its estimate for contraction this year in the world’s leading industrialized countries to 3.7 percent from 4.1 percent, yet predicted the rebound would be “modest.” It urged central banks to keep monetary policy on hold well into next year.
Debate over the economy may be overshadowed at the G-20 meeting by discussions on regulating finance and compensation at banks following the crisis that followed last September’s collapse of Lehman Brothers Holdings Inc. While governments agree bonuses should be reined in, they have yet to agree how to turn that into policy.
Bonus Limits
U.K. Prime Minister Gordon Brown yesterday joined German Chancellor Angela Merkel and French President Nicolas Sarkozy in proposing linking bonuses to fixed salaries and banks’ performance. Brown still opposes Sarkozy’s suggestion for a pay cap.
Geithner declined to comment on a specific plan before leaving for London, noting “there’s a lot in common in terms of basic strategy.” He is instead focused on pushing a new accord to restrain the amount of leverage that financial firms take on by setting standards for the quality and the amount of capital they hold in reserve.
“Strengthening capital requirements is an essential part of a broader effort to modernize our regulatory framework,” Geithner wrote in today’s Financial Times. “That is the most effective way to prevent the world from reliving the events of last autumn.”
The drive to regulate may be weakened by improvements in the economy and markets. Banks are regaining lobbying strength, and other political goals such as healthcare reform in the U.S. have captured the attention of legislators.
The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. They will release a statement about 4 p.m. in London tomorrow.
To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net
Last Updated: September 4, 2009 04:02 EDT |
