Short View: A lasting rescue rally?
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
We have been here before. Markets have rallied in response to government rescues many times over the past 18 months. But Monday’s effort was special, with the S&P Financials index gaining 17 per cent, and the S&P 500 enjoying its best day since October. So will this time be different?
Another way to look at the 23 per cent rally in the S&P since it hit a trough two weeks ago is that it has merely brought the index back to where it stood after the disastrously received February speech in which the US Treasury secretary, Tim Geithner, laid out sketchy plans for a bank rescue.
The market now has the small print that it had expected then, and has recovered from the extreme crisis of confidence that hit it in the intervening weeks.
Sentiment is much better, across most risky assets; the MSCI emerging markets index is now up for the year, and the oil price is near a four-month high. This is now the most convincing rally of this bear market.
But will this be the rally that ends the bear market? The critical issue is whether the Treasury’s plan works. The initial enthusiasm of several large asset managers to be involved on Monday helped drive the market’s positive reception. But the plan assumes, like its predecessors, that the basic problem is one of liquidity. It aims to put a price on securities that are not trading. If the problem is really one of solvency – that current prices for these assets are accurate – the gains will not be durable.
Confidence in politicians was the other driver of the February sell-off – and that issue returned last week when stocks sold off sharply in response to the House of Representatives’ plan to tax bankers’ bonuses.
Emotion is high on all sides. Wall Street is raging against the dying of the light, and Congress is responding to populist rage. Those emotions could yet derail this rally.
Comments