A strong rise in u s manufacturing output in December along with construction activity and a reduction in jobless claims provided the backdrop for upswing in American markets. The Dow Jones industrial average closed the first trading day (Jan 3) at 11670.75, back to pre-crisis levels of august 2008. The broader s & p 500 and NASDAQ (tech) stocks also touched highs not seen in 26 and 36 months respectively. .

US stocks had turned bullish in December following the bipartisan tax deal with a new round of fiscal stimulus designed to give a boost to consumer spending and GDP, is now expected to grow at 3.5 to 4 per cent in 2011 with a modest decline in unemployment rate from 9.8 to just 9 per cent by the end of the year. The Federal Reserve’s new round of purchase of Treasury securities (quantitative easing) to provide support for growth and employment also helped to boost market sentiment.

Upswing in manufacturing activity in Europe along with financial and technology stocks (USA) and strong run-ups in emerging markets helped to make it a global rally at the start of 2011. Brazil and South Korea also reported higher-level manufacturing performance while the pace of expansion somewhat slowed in China and India

President Barack Obama returning from a two-week holiday in Hawaii said he expected to build on “good progress” the economy had started making, and he appealed to the Republican leaders to put aside politics this year “to make sure we build on the recovery and deliver jobs for the American people”. Republicans take control of the House of Representatives on January 5.

IMF’s First Deputy Managing Director Mr John Lipsky struck a note of “cautious optimism” for 2011 which, he said, would be a “pivotal year for global economic recovery and for international cooperation”, given the “formidable challenges” to be addressed for strong, sustained and balanced growth in the “post-crisis world”. IMF which had undergone significant reform in 2010 would have a key role in providing the technical underpinning for the Mutual Adjustment Process of G-20 in measuring progress of major economies toward the agreed objective of sustained growth and reduction of global imbalances.

Global inflation has, however, emerged as a threat with liquidity sloshing around and soaring demand in emerging markets led by China fuelling a surge in prices of economically sensitive commodities like oil, copper and other metals, grain and cotton. Many Asian nations are already grappling with inflation, China acted strongly as 2010 ended to hold prices in check while food price inflation in India continues to linger for over two years now.

Oil prices rising in recent weeks closed out 2010 at 91.38 dollars a barrel. Despite the rise in global demand, largely from China and other fast-growing developing countries, OPEC has deferred any increase in supply thus putting pressure on prices. China’s auto boom and double-digit growth needs would itself, market analysts note, push oil prices toward the 100 dollar a barrel mark, a price OPEC nations assume the world economy could bear.

Supply constraints have propelled prices for various food crops including wheat, corn and soybeans, which raise concerns about meeting the basic needs of people in importing countries. In metals, copper prices had risen by 33 per cent while investors went for precious metals like gold which ended 2010 with a record 30 per cent rise to 1421 dollars per ounce.

The energy and commodity price surge has begun to impact on consumers globally. In low-inflation euro-zone, CPI had risen by 2.2 per cent year-on in December, above the European Central Bank’s benchmark of 2 per cent, for the first time since November 2008. In US, long-term inflation expectations remain stable, according to FED which is ready to use its tools to withdraw excess liquidity as and when CPI inches closer to its target of 2 per cent. US, EU and Japan are keeping interest rates at the lowest ever.

US recovery would get a jump-start if US corporates holding nearly two trillion dollars in cash and other liquid assets begin to hire and buy equipment and benefit the economy. The Obama Administration has opened a dialogue with business on job creation. Some CEOs may hold out for a while to see what Republicans committed to cutting down the size of government would achieve in the new Congress.. Firms are also looking for signs of strong revival of consumer confidence before embarking on plans to hire and expand business.

World markets, especially in USA and EU, have come to depend increasingly on growth in China, as a lead player in global economy. With its commitment to further opening up of its large market, China seems to hold the key for every Wall Street firm. Global initial public offerings of Chinese companies amounted to 104 billion dollars in 2010, according to tracking firm Dealogic, while US accounted for less than 34 billion out of a global total of 269.4 billion dollars. China has also the largest listing of foreign firms in American exchanges.

Global mergers and acquisitions (M&A) picked up strongly in 2010 to total dollar volume of 2.4 trillion, according to Thomson Reuter data. In USA, merger volume rose 14.2 peer cent to 822 billion dollars, energy and power being the dominant sector for deal-making. Investment bankers engaged in deal-making expect a further rise in volume of M&A in 2011 involving China, India and other developing economies. In 2010, BRIC countries accounted for 53 per cent of such deals. Entities based in Asia-Pacific region invested 147.8 billion in buy-ups in other regions.

In 2010, China deployed its pile of reserves which exceed 2.6 trillion dollars in various ways to build its economy stronger for the long term including by expanding investments overseas, mainly in Africa and Brazil, for secure sources of supply of oil, gas and other natural resources. China was also about to overtake Japan as the second largest spender in R & D to become next only to USA.

At the start of the third year since the collapse of Lehman Brothers, the worst seemed to be over for the world economy. USA was able to avert double dip recession in 2010. In Europe, the slow recovery of less than 2 per cent and the sovereign debt crisis in some euro-zone countries will continue to pose risks to the stability of the monetary union. For emerging economies on above-trend growth, IMF cites risks of rising asset prices, accelerating inflation, overheating, growing capital inflows and strengthening currencies. (IPA Service)