02 April 2009

G20 summit and today's markets

Markets reacted very positively to the G20 announcements (full press release). In essence:
  • More regulation and overseeing of the finance industry, and for the first time hedge funds
  • More money ($1.1 billion in all), in particular to the IMF that will treble its available resources to $750 billion and see its role strongly reinforced
  • More transparency with tax havens
The rest is rhetoric and we will see how the details of today's decision develop. I however note that the reasons for the crisis (lax monetary policy, over indebtness, poor governance and incompetence) were in no way dealt with in the communiqué nor the solutions to cleanup banks balance sheets; this is left to each country to decide.
  • More regulation is still vague on its form and implementation, whilst regulators should have done their job right in the first place: why should they be better in the future? I feel we need better regulation, not more regulation.
  • More money? Fine, this will bring more well paid employment to Washington. At least it will leave governments not directly involved in baling-out some countries in Eastern Europe and elsewhere. After all, when one sees the disunity in Europe about the subject, it is politically easier and probably more efficient to let international organisations take care of it. Remember nevertheless that the $1.1 trillion (1) is not funded (2) will be spread over 2 years and (3) represents +/- 5% of all money committed by States individually and collectively as well by international organisations. However, this probably is the most interesting part of the summit.
  • More transparency with tax heavens? Luckily the conference took place on the 2nd of April, but what a joke! The well-timed publication of the OECD progress report on tax heavens (dated April 2) would be quite fun if the matter was not serious. I could not find the Delaware and Nevada (US), St Barthelemy (France), Hong Kong and Macao (China), or Dubaï, and the list is far from exhaustive. Governance and equity should start with Head of States. True, politicians are back in force, and I am afraid, this is not good news for the future.
I am therefore not as enthusiastic as most commentators (where they waiting for the worse after postures played by some countries like France? - usual politician tactic to make sure they will show to their public (1) the conference is a success and (2) each of them is the victor). I however do not dismiss that the rally will continue for some time since the Conference did not end up in shamble.

Markets reacted positively to the summit, extending their early gain in Europe with Germany up +6.07% and the UK +4.28%. The Dow passed the 8,000 mark but did end up at 7,978, +2.79%.

The ECB surpised with a 25 b.p. rate cut to 1.25% vs a 50 b.p. the market was expecting. At the press conference, ECB president Jean-Claude Trichet did however say that the current level is "not the lowest limit", suggesting at least one more 25 b.p. cut.

The EUR rallied vigorously ending the day +1.7% at 1.3463.

Precious metals were under pressure with markets rallying and the G20 meeting announcing the sale of gold (limited amount however at approximately 5% of IMF holdings). Gold ended down 2.3% at 905.33/oz, off the lows of the day ($895.25/oz).