Global Markets Weekahead: shock and awe needed for risk rally

After a poor start to the fourth quarter, investors' mood may be just starting to stabilise after moves by European policymakers to help fragile banks and avert a financial meltdown. But it may take a lot grander plan to truly kick start a risk rally.
The coming week - packed again with heavy political and economic events - may provide a key insight into what kind of initiatives policymakers are planning to implement to stave off recession and contain the effect of a possible Greek default.
The start of the third-quarter US earnings season - with Alcoa, JP Morgan and Google due to report - also offers a health check-up on the corporate sector in an economy under threat of another recession. World stocks, measured by MSCI, rebounded 8 percent after hitting a 15-month low earlier in the week and are on track to post their second weekly gain.
This, to an extent, bodes well as the fourth quarter has been the best period for equities since 1971, with stocks rising on average 3.7 percent in the period.
What has bolstered the market was some policy moves. The Bank of England surprised investors on Thursday by launching a second round of quantitative easing, pledging to buy a bigger-than-expected 75 billion pounds of assets with new money. The European Central Bank followed up with aggressive liquidity measures, throwing a lifeline to cash-strained lenders. The European Union also said it would present a plan for a co-ordinated re-capitalisation of banks by member states.
For many investors, who have already moved to a defensive strategy of underweight equities and overweight bonds, it would require a "shock and awe" development to turn their mood around.
"You will probably need 2-3 trillion euros to frighten the market. We are positioned as if the euro will break up - underweight periphery, banks and euro. We don't think it will happen but the market pain could be as hard," said Carl Astorri, global head of economics and asset strategy at Coutts.
"Sixty percent of the world GDP is deleveraging, which slows down growth. That's a long process, just as credit bubbles took time to build. We may be in the process for another 3-4 years."
Over the weekend, French President Nicholas Sarkozy is meeting head of IMF Christine Lagarde, before moving to Berlin to meet German Chancellor Angela Merkel where they are likely to discuss bank re-capitalisation.
The focus is also on Franco-Belgian bank Dexia, which has become the first victim of the fresh crisis after its shares fell to a record low before suspension. The board will vote on a break-up plan on Saturday.
Friday brings the Group of 20 finance ministers meeting, where investors could assess the appetite of surplus-rich BRIC emerging nations - Brazil, Russia, India and China - to help the eurozone.
A source told Reuters the European Commission is expected to present a proposal on bank re-capitalisation before the EU leaders summit on October 17.
Credit Suisse said it would revise its underweight position of continental European stocks if it saw an additional package worth at least 1-1.5 trillion euros, equivalent to 40 percent of outstanding debt in the peripheral eurozone countries. Within this, Credit Suisse reckons European governments should spend 300-400 million euros to recapitalise banks.
It also said a weaker euro needs to be part of the solution of the eurozone problems, given each 10 percent decline in the euro adds 0.7 percent to European GDP growth.