Stephen Gunnion
17 November 2008
Johannesburg — LEADERS of the Group of 20 industrial and developing states meeting in Washington at the weekend have backed a plan to restore global growth and reform financial systems in an attempt to halt the crisis that has wiped trillions off share prices globally, led to the demise of top banks and bankrupted many companies.
But the summit was big on resounding intentions and short on concrete plans. The world will have to wait until April to see how serious they are when leaders hold a second summit, probably in London.
By then, finance ministers will deliver a catalogue of measures designed to rein in risky investing, including better regulation of financial markets, revised accounting rules and an assessment of the compensation of bankers.
Despite the lack of substance, leaders claimed they had accomplished much just by gathering in such large numbers to grapple with the world's financial panic and pledging to work together to contain it.
US President George Bush hailed the meeting as a success, saying leaders agreed to pro-growth policies.
"It makes sense to come out of here with a firm action plan, which we have, and it also makes sense to say to people that there is more work to be done, and there will be more meetings," Bush said.
Meanwhile, markets are likely to remain volatile this week as more poor economic news and the likelihood of hedge funds further liquidating their positions spook investors.
After rising 6,7% on Thursday, US share prices fell sharply on Friday -- the Dow Jones industrial average closed 3,8% lower -- as poor retail sales figures showed the US recession was intensifying.
The US commerce department said on Friday that sales fell 2,8% last month, the fourth successive drop and the largest since records began in 1992.
Spending was expected to continue to falter as mounting job losses, falling share prices and weaker home values put pressure on consumers.
Other markets gained ground on Thursday's rally on Wall Street, with the JSE all share index rising as much as 4% on Friday, before giving up most of the day's gains to close 1,7% higher at 19414. The rand strengthened to R9,99 to the dollar before settling at R10,13.
On the European markets, London's FTSE 100 index closed 1,5% higher and the CAC-40 in Paris was up 0,7%.
Official data showed the euro zone slipped into recession in the third quarter, the first time since the launch of the common European currency. Although France's economy grew marginally, Italy and the Netherlands joined Germany in reporting a second quarter of negative economic growth. Spain's economy shrank in the third quarter, but grew in the second quarter.
"A further contracting in euro zone (gross domestic product) in the current fourth quarter seems virtually assured," said Martin van Vliet at ING Financial Markets.
Europe is SA's biggest trading partner so recession there is likely to affect SA. "We think that the situation is likely to get worse before it gets better," said Nick Kounis, an analyst at Fortis Bank.
"We will probably see further falls in output in the first few months of next year before a gradual improvement later in the year, but we think that there will be no real recovery before 2010."
Doug Blatch, head of equities trading at Investec Asset Management, said market volatility was likely to continue in the short term. "What we would like to see is volumes pick up a little bit. I get a sense there is a general fatigue in the market," Blatch said.
Since the high-volume trade in shares a few weeks ago, liquidity had dried up, and this had added to volatility, said Blatch.
"Investors are just choosing to sit on their hands at the moment," he said. "It's pretty hard to try and make a call one way or another when that is happening."
Blatch said that much depended on the extent of hedge fund redemptions.
The average US hedge fund has fallen 15% this year. Investors, including pension funds, endowments and wealthy individuals, have been cashing in. Last month, investors withdrew $100bn from funds, according to hedge fund data tracker Eurekahedge. Analysts expect that number to keep rising in the next two months.
Russell Lamberti, an economist at Econometrix Treasury Management, said recent rand volatility was likely to persist as long as the correlation between the rand-dollar exchange rate and the Dow Jones held. Extreme volatility in equity and commodity markets would continue to affect the rand.
With Reuters, AP
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