Investors take heart from signs of stabilisation

Wall Street staged a solid rally and European stock markets steadied yesterday as the heightened risk aversion seen in the previous session appeared to ease.

While the underlying mood among equity investors remained cautious – particularly towards the financial sector – markets took heart from further indications that the worst for the global economy might be over.

“Investors' apprehension over the results of the ‘stress tests' for US systemically important financial institutions has been the catalyst for a wave of profit-taking in risky assets across the board,” said Francesco Garzarelli, strategist at Goldman Sachs.

“Nonetheless, signs of growth stabilisation are spreading, and the consensus for growth is forming a bottom.”

US bank stocks rallied as the worst of the fears over the stress tests were soothed by Tim Geithner, the Treasury secretary.

His remarks that the “vast majority” of banks had more capital than needed helped offset some disappointing earnings from the sector and the International Monetary Fund's latest forecast that global writedowns in the sector could total $4,100bn.

Alan Ruskin, chief strategist at RBS, noted that it was only a year ago that the IMF had suggested aggregate losses of $1,000bn.

“Globally the scale of the problem will continue to undermine the monetary transmission mechanism,” Mr Ruskin said. “This is solidly risk-negative in the medium term.”