Posted on August 12, 2009 - by Jeflin

Don’t Bet On A V-shaped Economy Recovery

Photo by Manel

Are stock markets heading for a breather? Euphoria surrounding Asian equities have cooled down considerably over the past week, prompted by profit taking amid concerns that stock valuations ramped up too fast and are inconsistent with underlying earnings.

More importantly, China declared its intent to rein in the flood of new bank loans to the tune of Rmb7,370bn (more than twice the amount lent last year), many of which appear to be speculative in nature.

Recently, Chinese regulators ordered banks to ensure the record number of new loans are funnelled into the real economy and not to inflate asset bubbles in the equity or real estate markets. Banks must now monitor how their loans are spent and that has temporarily stopped the red-hot Shanghai stock market in its track.

Over in Europe, economic conditions are looking more promising but they are not out of the woods yet. German industrial production fell 0.1% as compared to an estimated increase of 0.5%. The UK economy has a smaller contraction for the second quarter but weaknesses persist in the financial and business services sector.

The Bank of England’s decision to increase the size of its asset purchase program shows that the UK financial system is still suffering from deleveraging and a deluge of toxic assets. Compared to leading US financial institutions which are sheltered by the Federal Reserve, European banks have more dark days ahead.

Don’t expect them to report blow-out earnings on the scale of Goldman Sachs. In fact, Royal Bank of Scotland just reported huge losses of 1.04 billion pounds, despite revenue increasing 58%. The loss was mainly due to an increase in bad debts to 7.5 billion pounds.

Meanwhile, the European Central Bank has provided about $600 billion financing to the banking system as it foresaw a credit crunch in the fall and may be taking advantage of this bullish period to create a buffer against a possible funding shortfall.

As for the US stock market, it closed on a high last week after rebounding from early weaknesses due to an optimistic report by the US Labor Department. Unemployment rate slipped lower to 9.4% from the forecast 9.6%. Nevertheless, jobless claims increased which means jobs remain scarce and businesses are not expanding as fast as the heady stock market suggests. Read more…

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