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EMERGING FROM THE
GLOBAL RECESSION
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LIQUIDITY
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ENSURING SAFETY
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SINGAPORE AS AN
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Financial Markets are Improving but Vulnerabilities Remain

In response to improving global economic conditions and accommodative monetary policies, global financial markets have rebounded strongly, as investor risk appetite returned. From the equity market trough in March 2009 to end-March 2010, the S&P 500 rose more than 70% while the MSCI Asia ex-Japan doubled in value. The widely-tracked Volatility Index (VIX), a measure of the implied volatility of S&P 500 index options, eased significantly over the same period.

The stronger-than-anticipated recovery in macro-financial conditions has in turn bolstered banks’ earnings, raised Tier-1 capital ratios, and helped restore the flow of private credit.

Indeed, bank lending has increased and credit conditions for the private sector have largely improved. This has set the stage for central banks and governments to gradually exit from some unconventional support measures introduced during the crisis and to begin the process of normalising monetary policy. In the US, for example, the Federal Reserve ended its programme of purchasing agency mortgagebacked securities in March 2010. Nevertheless, worries about public finances as well as weaknesses in the real estate sector and labour market in some countries will continue to weigh on market sentiment in the near term. As was evident in the first half of 2010, the reappraisal of sovereign risk cast a shadow over continued improvements in economic fundamentals and corporate earnings, triggering occasional spikes in risk aversion and flights to quality in financial markets.