Two reasons for optimism in the downturn: Gottliebsen

Picking short-term trends in the sharemarket is a hazardous occupation but one has a sense that after the recent huge rise, a correction is in the wind.

However, the two pillars supporting this market are not threatened at this stage. Keep this in mind if any correction gathers momentum.

The first pillar is the fact that we are now confident that the world can avoid another banking crisis. Over the weekend US Treasury Secretary Timothy Geithner detailed how any rescue plan would work. The US Government is stress testing banks, and the results are due at the end of this month.

Once the stress tests are finalised and the capital needs are determined, banks will have six months to raise capital in the private market or could take an infusion of Government funds.

Given that the IMF is forecasting much higher bank losses than have so far been disclosed, this stress testing will be a dangerous exercise and may test the higher share prices on Wall Street.

Some nasties are likely to be revealed, particularly as a few global bank CEOs are not as open about their situation as they should be. But it’s an important part of stabilising longer term world markets.

The second pillar is, of course, the Chinese buying of metals, particularly copper. Late last week there were signs that the Chinese were pulling back because the metal prices had risen too far, too quickly.

This is exactly what you would expect, and don’t be surprised if at some time you see Chinese metal selling intended to frighten the traders. Apart from stockpiling metals, what the Chinese have done is taken copper to a level where there will be a lot less closure of mines, and some groups will be looking at expanding.

Whichever way the market moves in the next few weeks, our second pillar – the intention of the Chinese to stockpile metals, led by copper, as a better alternative to the US dollar – is intact. Meanwhile the US dollar may be headed for a fall given the massive money printing exercise that is planned. Provided it does not go too far, any fall will help the US heal its wounds.

As in the Wall Street arena, do not be surprised if there is a minor metal correction, but currently the traders smell an opportunity and over the weekend when copper showed weakness they jumped in.

The Chinese have also opened a new front in their campaign to diversify out of US dollars. According to The Australian China’s national pension fund is planning to buy low-priced global assets. We have seen Australian miners go to China for their funding, but this move will give the opportunity for industrial companies who are struggling to raise capital to diversify their funding base.

I am sure a number of Australian property and infrastructure groups will test the water to see how far the Chinese will stray from national resources. This second pillar, the Chinese buying of metals and assets, is really good news for Australia.

This article first appeared on Business Spectator