To get further improvement in the global economy, we need to have positive news in these four areas.
- Central banks - More liquidity is necessary especially from the ECB. the European central bank has made comments that are less hawkish and they have been willing to take almost any collateral, but more is needed in Europe to help banks. A rate cut and more assets on their balance sheet. The US has operation twist but a QE3 would support asset prices. There is more liquidity being provided in emerging markets, but the process has just begun after an early tightening cycle. The market wants to see more asset monetized.
- Growth path - Good economic news in Europe is critical given it is ready to fall into a recession, but the US needs to show better than trend growth to get a change in negative expectations. China needs to show more internal growth and not just increases in exports. Emerging markets growth will slow. This should be expected. The problem area is developed markets.
- Debt crisis - A bank recapitalization program is critical. Write-downs have to be taken and then capital raised for the banking sector. This is what will move the markets.
- US politics - No gridlock. Any cooperation will be a welcome sign.
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