3rd - 7th Oct 2011 was a week of really V-shape happening in global stock markets all contributing by the news and events from US and Europe. Nevertheless, nothing has changed so far from macroscopic point of view regarding global economic.
In US, economic data still showing economy is growing but at a slower pace than expected with the unemployment rate stubbornly stuck at 9% level despite the number of jobs added in the month of September surprised on the upside. There is at the moment no clear confirmation of economic data that US is in recession. US Fed also commence their first installment of "Operation Twist". Unlike the previous two QEs whereby printing money was straight off the block, the impact of the economic front is not immediate felt. The earliest the stimulus "Operation Twist" could be seen would be roughly 3 to 6 months later. Hence, observation of improving economic data 3 - 6 months down the road can confirm the effectiveness of "Operation Twist". "Operation Twist" will not help to resolve the high unemployment issue that is for sure and the only way now is President Obama's jobs plan which the Congress has to pass as a bill. Whether that could pass as a bill entirely as what Obama proposed is yet to be seen due to the political situation in US. Impact of Europe debt crisis on US economy at the moment still unknown but US financial banks presently are in a better shape than what they were in 2008 to minimize the impact of it.
In Europe, Greece failed to meet its debt target resulting failure to meet IMF/ECB's requirement to release the 8b euro bailout funds has sent global stock markets to tail spin earlier this week as fear of Greece default provided all the negative sentiment to investors. The first action to control EU debts was finally seen this week when ECB maintained its interest rate at 1.5%, extended loan to banks for 1 more years and will resume covered bond purchase. In additional, BOE decided to print more money to provide the much needed liquidity to its financial sector. News of EU leaders working on plan to recapitalize their banks in the case of Greece default also brought some relief to investors which caused a V-shape rebound in global stock markets. Whether Greece will default or not could only be known in November. The actions taken so far by EU probably has factored in the case of Greece default and start building firewall around the banks to provide the liquidity to prevent immediate credit crunch. Economic data wise from EU probably suggested EU is into recession. Should expect more stimulus measures from EU in the coming months and impact of that could only be seen 3 - 6 months later from the economic data.
Global stock markets at the moment still neither here or there scenario. No clear confirmation global is in recession at the moment and no clear confirmation that the worst is over either. What can expect is US and EU should be ready to act with stimulus package should conditions do not improve in the coming months. Cutting of interest rate and perhaps money printing from ECB should be on the card should conditions do not improve by end of this year. In US, US Fed has held off printing more money and perhaps use that as last resort ( in the case of US recession ) and awaiting on the effect of "Operation Twist" and Obama's jobs plan.
Investors at the moment should maintain neutral stand and continue to stick to plan for the 2 extreme scenarios, namely, recession and sharp rebound. A time frame of 3 to 6 months later from economic data should be able to give a clearer picture which scenario the global stock markets are heading to. Meanwhile for the time being, stock markets just range bound and practically a traders' market.
For long term investors, maintain and conserve cash and wait for either of the scenario to unfold then return back to the stock markets would be a wiser move.
For short term traders/investors, the range bound markets which highly sensitive to news/events presents a buy on dip and sell into strength opportunities.
Do not speculate on what will happen but rather analyze what will be happening
