Markets Rally – But Killjoy Analysts Warn that the Bad Times are Not Yet Over

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Just when investors were starting to think that there would be no end to the downward spiral on the stock markets, concerns with regard to the U.S. economy and financial system eased up a bit in the past two days. This had a marked positive effect on global stock markets, as did the unexpected fall in oil prices. Moreover, solid results for some U.S. banks helped to stem the flow of negativity, while the announcement by the International Monetary Fund (IMF) that its 2008 global growth forecast has been adjusted to 4.1 percent from 3.7 percent added to the positive tone.

Wall Street’s gains on Wednesday have been largely attributed to the release of second-quarter earnings by California-based bank, Wells Fargo, which turned out to be better than expected. Thursday saw the release of a similarly positive report from JP Morgan Chase, one of the oldest financials services companies in the world and the largest banking institute in the United States, measured by market value. These encouraging reports helped to some degree to calm investors’ frazzled nerves, while providing a confidence boost to U.S. banks.

Taking into account the ongoing market volatility, which was highlighted by an increase in oil prices late on Thursday, analysts are being cautiously optimistic. D.A. Davidson & Co analyst, Fred Dickson, points out that the Wells Fargo and JP Morgan Chase earnings were in themselves terrible, but the fact that they delivered results above pessimistic estimates has raised hopes that the financial sector is not in as bad shape as Wall Street had feared. Citigroup has been particularly hard hit by the sub-prime loan crisis and its upcoming results on Friday will provide a further indication as to the state of health of the U.S. financial sector.

Some analysts assert that the sudden boost in the equity market can be attributed, to some extent, to the U.S. Securities and Exchange Commission’s decision to limit certain short sales which aim to cash in on the market decline.

The past few days have been a light at the end of the tunnel for many investors, however, the International Monetary Fund has cautioned that rising inflation figures are still a major cause for concern, and have increased their forecast for developed economies from 2.6 percent to 3.4 percent. Developing economies face even higher inflation percentages, and after factoring in higher oil prices, the IMF’s forecast increased from 7.4 percent to 9.1 percent. Despite ongoing concerns with regard to inflation figures, the IMF has affirmed that the outlook for the economy of the United States – the biggest in the world – was not as gloomy as anticipated and has set the 2008 growth forecast at 1.3 percent.

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