“We should still be afraid,” say Tony and Rob Boeckh in an update to The Boeckh Investment Letter (subscription required). Stock markets have rallied recently but it’s unlikely the upswing represents a major turning point.
In fact, the Boeckhs still adhere to their previous recommendation to refrain from rebalancing toward equities until better value emerges. “The global financial crisis will likely continue to drag the markets down for a while longer,” they note in another recent update.
Better-than-expected U.S. economic data provided some relief that a recession was not imminent, but the U.S. nevertheless remains mired in an environment of low growth and high unemployment. In addition, government deficit reduction efforts will be a drag on economic growth.
Eurozone leaders have promised to present a solution to the eurozone crisis at the early November meeting of the G20, but the Boeckhs believe the plan will not likely allay concerns. As Gideon Rachman writes in the Financial Times of London: “The fact that national loyalties are much stronger than any common European loyalty means leaders are constrained in the solutions they can feasibly consider.”
The only chance of eurozone leaders coming up with an effective response is if their feet are “held to the fire by rioting markets.” The current stock-market rally dials down the heat and diminishes the prospect for convincing action. “Consequently, we cannot assume that the worst is over in the euro crisis saga,” the Boeckhs conclude.
There are also some new developments in China. Share prices in the country’s big four banks have collapsed (the government has stepped in to prop up them up). It appears the risks of a financial crisis in China are higher than originally thought.