Frost lines

For the markets, the key to continued revival lies in ensuring participation of local and foreign investors which has remained low in the past four months

A month and a half into financial year 2010 and equity markets seems to have caught a cold in the freezing temperatures that are being witnessed in some of the European and American cities. In the US - S&P 500 is down by 1.40 per cent while UK - FTSE is lower by 2.25 per cent.

Eastwards, France is at -5.36 per cent and Germany at -5.19 per cent. The second leg of winter has not spared the emerging markets either, with Shanghai A share index down by 7.94 per cent, India - Sensex down at 5.93 per cent and MSCI BRIC index lower by 4.07 per cent.

The weather, however, is getting warmer as we head into the Middle East region with the Gulf markets faring better than the bigger peers - Bahrain is up by 3.12 per cent, Oman by 5.85 per cent, Kuwait up by 8.96 per cent, Saudi by 4.73 per cent and Abu Dhabi by 0.57 per cent.

The only markets that are in negative are Qatar at -0.74 per cent and the UAE-Dubai in the red with -9.71 per cent, perhaps due to nervousness on the second round of debt repayment coming soon (See Graph: World Market Performances).

Weather aside, what has frosted the equity markets are the hangover of the World Economic Forum discussions, Barrack Obama's announcement of imposing stricter Proprietary trading rules for banks, China's central bank's measure to tighten some of the liquidity flow that was started last year with its US$586bn stimulus plan and question mark on Greece's GBP190bn debt to foreign banks.

Confidence in the world economy has dropped in February on concerns of worsening government finances in the PIGS (Portugal, Ireland, Greece, Spain) which may derail the global recovery. Greece, Spain and Portugal are among European nations struggling to control widening budget deficits, prompting investors to dump the countries' assets and question the sustainability of a recovery in the global economy.

More than US$4.5tn has been wiped from stocks worldwide since January 14, while credit-default swaps have risen as investors seek protection against deteriorating European government finances. US President Barack Obama had announced in January a proposal - Volcker Rule - to ban proprietary trading at the US banks. Members of the Senate panel have been working for weeks to translate into legislation the plan Obama released in June last year to overhaul the US financial rules.

Obama named the January 21 proposal after its chief proponent, ex-Federal Reserve Chairman Paul Volcker, now a White House advisor. Based on an idea circulated, it would force banks to stop the trading they do on their own accounts and give up their stakes in hedge funds and private equity funds.

As soon as the plan was announced, market world over went into a tailspin. Further, China's announcement of raising interest rates has slumped the markets by ten per cent in 2010 on concerns that the government will raise interest rates and curb lending to cool the economy and avert asset bubbles.

According to reports, China's largest bank will curb lending to industries with overcapacity and step up monitoring of loans to local-government financing arms and for land purchases. China plans new measures to rein in overcapacity in steel, cement and other industries amid a surge in bank lending according to opinions expressed by Zhu Min, the Deputy Governor of People's Bank of China, who spoke at the World Economic Forum meet in Davos.

Frost lines
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