Market Reaction to G20 Summit
The latest G20 Summit hit the headlines hard, with banking reform and deficit cuts featuring prominently, but reaction from analysts and markets has been mixed.
The reaction to the G20 Summit final communiqué has not been entirely positive, with more analysts than not picking holes in some of the grand and striking commitments that were agreed upon.
'...advanced economies have committed to fiscal plans that will at least halve deficits by 2013...'
This is an impressive commitment – it certainly grabbed the headlines – but more important than the 'what' in this case is the 'how'. Failure to act would certainly hamper growth, but there is also the risk that synchronised fiscal adjustments across several major economies could have an unwelcome effect on the global recovery.
The difficulty here is in finding a unilateral course of action to suit all economies. The US, UK and Europe can't seem to agree on fiscal tightening policies or sovereign debt remedies, and the developing world is concerned that a weaker first world will do irreparable damage to their vital export trade.
'...the core of the financial sector reform agenda rests on improving the strength of capital and liquidity...'
The issue of banking reform was one of the key issues discussed at the Summit, with both David Cameron and Barack Obama pressing for telling and urgent action. The following points of reform were agreed upon:
- Banks' capital requirements will be significantly higher
- The quality of this capital must be improved to better absorb losses
These points form part of the overall plan that is to be finalised for the next G20 meeting in Seoul in November. Despite the compromise on time, Chancellor George Osborne called the commitment 'a significant step forward'.
Market reaction
Events such as the G20 Summit obviously have an effect on markets, both in the longer term as policies are implemented and in the short term as particular markets react on impulse. The mere mention of ‘banking reform’ over the summit weekend sent Standard Chartered shares into decline on Monday morning, for example.
Reaction on the FTSE 100 overall, though, was rather muted. This can probably be attributed to the perceived leniency shown by G20 leaders, in that while their stance on banking reform in particular appears firm, the delay in a call for action came as something of a reassurance for banks.
While the FTSE did not react obviously and immediately to the G20 Summit, speculation on Tuesday that growth in China may be cooling caused the index to plummet more than three percent.
Sustained and balanced growth is key
In 2008 the G20 Summit was essentially created out of crisis, to bring the developed and developing worlds together in response to the financial crisis of the last few years. At the time it was clear that steps were necessary to avert the breakdown of global trade – the whole was more valuable than the parts. Now that recovery is underway, however, the parts are starting to look out more for their own interests, leading to some disagreement among leaders on the best course to steer.
Economic recovery in the UK, for example, has been built quite strongly on trade, which makes it all the more important from a local perspective that the world's financial ships are lifted by the same rising tide. Sustained and balanced global economic growth will be key to continued economic recovery in Britain.
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Updated: 30/06/10
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