Dead cat bounce or real recovery?

Over recent days the market has been acting as if a bottom has finally been reached. Data releases such as the surge in US housing starts and other less negative economic numbers have helped. More importantly, some banks have noted that they have had a strong start to the year, which will come as a relief to many bank shareholders who have seen their holdings disintegrate over recent months. Along with the improvement in risk appetite the US dollar has weakened as the repatriation of US money from overseas has slowed and the safe haven bid for Treasuries has pulled back.

How long will it last? Not long in my view. Markets have been heavily sold and some form of recovery had to happen but it will not be sustained and is more like a dead cat bounce than a market turnaround. The economic news will remain bad and if anything will get a lot worse in the weeks and months to come whilst banks remain heavily burdened with toxic debt. Moreover, the issue of how to value this debt remains a problem in that it is a key obstacle to removing such debt. Indeed, the US and global economy for that matter will not stabilise until the end of this year. The next problem for banks will be consumer debt and credit card defaults etc even if other toxic debt is removed.

So, I would suggest not getting too excited by this market as the potential for disappointment is very high. As for the dollar, it is getting hit but not dramatically and as risk aversion picks up once again, the dollar will find itself back in command.


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