Will Central Bank Assistance Make a Difference?
The DOW rallied 416 points or 3.55% on Tuesday on news that central banks in the United States, Canada, Britain and Europe would help the current credit crunch, which could impact world markets and economies. The U.S. central bank plans to inject about $200 billion into the financial system.
While the news is positive, we have been seeing significant flows of capital into the market to try to ease the credit market tensions. The move will help, but clearly there is a real concern that the U.S. economy will continue to tank and sink into a full-blown recession later this year, which will negatively impact companies and growth.
In my view, it is difficult to imagine at this point that this move will help avert a slowdown or recession in the United States and elsewhere in the world. The reality is that the U.S. housing market remains a mess that could linger on and impact consumer spending and economic growth, as we have been saying all along.
In addition, oil prices continue to be bullish, and touched a record of $110.00 a barrel on Tuesday. The U.S. Dollar continues to waver and could get weaker, which could make foreign and domestic investors become more wary of holding U.S.- denominated investable assets, because of the real risk of them declining in value should the greenback continue to slide. This is a problem that could get worse.
Also, don’t forget that China has over $1.0 trillion in reserves and much of this is U.S. dollar bonds. A decision to diversify outside the U.S. by China could slam the U.S. bond market and put pressure on interest rates to rise in order to attract investments. Given that interest rates are declining, this would be a problem.
Remain prudent and be careful not to chase stocks until we see some market visibility.