Not a V-shape Recovery

World Bank has lowered its 2009 global growth forecast to a 2.9% contraction yesterday, its first since World War II. This reaffirms our view that the global economy is unlikely to experience a V-shape recovery.

Talks about V-shape recovery started to emerge towards the end of first quarter and getting stronger into May 2009. This was due mainly to the emergence of bottoming out signs in the first quarter of 2009. The US Factory Orders turned positive in February 2009, after six consecutive months of fallings.

Japan industrialproduction also stopped its five months of declines and started to register positive growth in March 2009. China industrial production year-on-year growth rate doubled to 11% in February 2009, from less than 6% growth in last two months of 2008, and German industrial production growth rate also turned positive in March 2009 after several months of declines.

While the sharp declines in global productions have halted, there are no signs that they are moving back to the pre-Lehman crisis level. In absolute term, the US Factory Orders remained weak in March and April 2009. Although Japan Index of Industrial Production has improved in March and April 2009, it is still below its January level. German industrial production remains weak despite signs of stabilization.

A V-shape recovery will require the US, Japan and German production to grow at a very fast rate in the next few months. Even the recovery phase of the US Factory Orders during the early 2000 recession was not really a V-shape recovery.

Thus, while we believe that global economy has bottomed out, it is not likely to experience a V-shape recovery. Recovery is likely to be slow and gradual with many pitfalls along the way.

Sponsored Links

Global equity technicals - Minor rebound soon?

As expected, the US stockmarket correction has kicked in. However, it appears likely that this correction phase is at its tail end. Assuming wave "c" equals wave "a", we are looking at an S&P target of 875. The daily chart shows the likely completion of minor wave "a" soon, to be followed by a minor wave "b" rebound. But it is unlikely that the rebound ahead will surpass the Jun high. The US Dollar Index has been trading sideways since breaking out in early Jun. A pullback below 79 would be bearish for the index. In line with the expected rebound of the US stockmarket soon, Asian markets should also bounce back but are unlikely to surpass the Jun highs. A rally above the Jun highs would indicate that a more bullish wavecount is taking place.

Any technical rebounds from the yesterday's near 2% loss is likely to be muted and short-lived with the STI still on track to head for our initial key support at 2194 (23.6% Fibonacci retracement of the recent surge from 1455 to 2424).

Any negative breakout from the 2194 level could mean further correction towards the major support at 2053 (38.2% Fibonacci retracement of the same rally), which seems unlikely to be tested at this point in time.

Next Resistance level: 2400 (Psychological cap)
Immediate Resistance level: 2300 (Psychological cap)
STI Current: 2226.10 (Last close: -1.8%)
Immediate Support Level: 2194 (23.6% Fibonacci retracement of Mar rally)
Next Support Level: 2053 (38.2% Fibonacci retracement of Mar rally)