Will Wall Street`s Rebound Fuel Global Recovery?

As the U.S. stock market returns to its pre-global economic crisis level, attention is being drawn to whether Wall Street’s rebound will drive the recovery of global stock markets.

Upbeat earnings reports from American companies in the third quarter pushed the Dow past 10,000 for a close of 10,015.86 Wednesday. The robust performance could be a signal meaning the U.S., the compass for global economic recovery, is getting out of the crisis.

Several U.S. economic indicators have also turned positive. Accordingly, expectations are high that the world economy will be relieved from the heavy burden of the financial crisis and grow revitalized soon.

Skeptics, however, say the U.S.-led recovery will have a limited impact on global stock markets since Asian economies and stocks have already begun recovering. Another question is if consumption and production will grow even after recovery is accompanied by a interest rate hike and disappearance of monetary policy.

Mirae Asset Global Investments President Koo Jae-sang said, “U.S. stocks might fluctuate in the near term. From a long-term perspective, however, Wall Street will rise thanks to better-than-expected corporate performance and improving economic indicators.”

The U.S. recovery has two key implications, however. Though it contributes to a surge in stock prices, it also weakens the value of dollar, thus raising the prices of raw materials such as oil and grain.

Inflationary pressure resulting from the increasing prices of raw materials inevitably causes interest rates to rise. Fides Investment Management Vice President Kim Han-jin said, “If U.S. stocks rise further, its growth pace will exceed that of economic recovery. In that case, the U.S. government will raise interest rates earlier than expected.”

Other experts say the rebound on Wall Street will encourage China, the second pillar of global economic recovery, to implement an exit strategy earlier than scheduled, which will dampen the recovery process. In contrast to the rise of leading U.S. indicators, those of China have improved since the second quarter and recently peaked.

HI Investment Securities director Jo In-jae said, “U.S. economic recovery will spark dispute over whether leading indicators of Asia’s emerging economies such as China and Korea have already peaked. To ensure China’s economy will not decline again, the U.S. economy should see robust growth, but this looks unlikely.”

Jo added that economic recovery will accelerate debt adjustment, not consumption, since U.S. household debt has not been resolved.

Kim, however, said, “Since Korean exports to the U.S., Europe and Asia have strong competitiveness, the Korean stock market will not decline significantly even when governments introduce exit strategies and the won-dollar rate falls to around 1,100.”

artemes@donga.com