John Hardy, Forex Market Strategist, Saxo Bank
This week's G20 comes at an interesting juncture relative to the last meeting that took place in a very different market environment in April. Back then, the prospects for a recovery were very fragile and the main purpose of the meeting seemed to be a showing of global solidarity: huge stimulus measures were to be maintained, international efforts aimed at bailing out weaker nations expanded, oversight of global financial markets - in the form of a revamped financial stability forum (now financial stability board (FSB)) - were to be strengthened.
Now, the massive public sector stimulus and central bank liquidity provision have managed to even the global economy's keel for now and even to instil a remarkable level of confidence in the prospects for smooth sailing ahead for the global economy. Even with various "current conditions" sentiment indices around the world mired in rather negative territory, measures of expectations suggest that many expect this recovery to take root and flourish in the coming quarters.
This very resurgence in confidence and economic indicators is precisely what could prevent much further action of substance from being taken at the G20 in Pittsburgh. As the perceived state of emergency recedes, so does the impetus for meaningful change. And there is plenty the various parties at the G20 will find to disagree about now that they have the luxury to do so.
Of the topics on the table, the most widely discussed is banking reform, where the mainland Euros, led by France, really want to crack down on the evil bankers and their pay, while the UK is less sure that this is a wise move, considering its country's traditional reliance on the financial services industry for its economic strength and influence. The US is somewhere imbetween and is more interested in new rules related to banks' capital reserves.
As for the broad front on further stimulus, with the economic outlook so seemingly positive, this may only be given lip service, but little more. The G20 will likely try as far as possible to avoid making decisions on many of the very difficult and intricate bank reform proposals and refer a laundry list of issues to the FSB or "further study".
All in all, we should expect a round of back-slapping and self-congratulation for a job well done now that it appears the economy is on the path to recovery, with little of major substance agreed upon outside of a few more rules on banks and their capital reserves. Our longer term view is that the market's confidence in the recovery is overdone and actually could increase the risk of disappointment down the road since so much of the publicly funded stimulus is borrowing from future growth potential.
Other G20 issues will see more divisive debate and could see less progress: emerging countries will be looking for more influence over the IMF, especially the BRIC countries - and they may be rewarded with limited additional say in the IMF's activities as a head-nod to the new weight in the global economy that these countries represent, though not as much as they are asking for going into the meeting. A package or two aimed at the most fragile economies in the world may be put together for the IMF as well.
One IMF issue actually does have the potential to move the markets and that is the question of the IMF's gold reserves and to what degree it is looking to sell gold to fund future activities. Gold recently crossed back above the 1000 dollar/oz. market and is considered a measure of sentiment on the US dollar due to the greenback's very weak levels.
China has suggested it may be interested in buying some of the IMF's gold reserves. Climate change will also supposedly be on the agenda, but with many emerging economies firmly set against taking on restrictions to economic growth, little is likely to happen in this area. So, as with so many of these past G20 meetings - the overwhelming likelihood is that the market has more than discounted whatever limited measures are likely to come out the other side of this meeting.
www.saxobank.cz
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