Investors must fasten their seatbelts and buckle up for a bumpy ride as fear and negativity could make a strong comeback when the summer is over, according to Saxo Bank, a trading and investment specialist.

In its third quarterly financial outlook for 2009, the Copenhagen-based investment specialist bank said the imminent global economic recovery was premature as the fundamental imbalances that pushed the developed world into crisis remained unaddressed.

According to the bank, market optimism is misplaced and recovery will be flat-to-w-shaped.

Saxo Bank’s chief economist, David Karsbøl warns that the market has looked too far ahead of the curve in pricing its recovery, and that the fundamental problems within the economy, such as the unsustainable debt burden leading to sub par consumption growth resulting in write downs and earnings recession, remain unresolved.

'In developed economies, the consumer has yet to deleverage, and in developing markets, export-oriented economies will require more time to restructure for sustainable growth in the future.'

'Risk appetite has increased in a nearly uninterrupted arc, as markets boldly predict a V-shaped recovery. However, we believe that the recovery will be flat-to-w-shaped and will take at least another 18 months to work its way through lay-offs, write downs and rationalisations,' he pointed out.

The bank warned that irresponsible fiscal policy, creating massive – and growing – public debt, would lead to bond market dislocation.

Karsbol adds: 'It is no surprise to see strong stock market bounces when the economy, as a result of the outright panic we have seen, has been so depressed.'

However, the degree and persistence of the rebound in risk appetite has been remarkable and surprised many, including Saxo Bank. Unfortunately, at some point during the next six months, we expect risk appetite to plummet again as the market realises that it has raced ahead of itself.'

The main question for the medium term will be long interest rates which, if they continue rising, could create an even more chaotic and volatile market environment than the already ugly one envisioned in the Saxo Bank’s baseline scenario for 2009 called 'Turbo-gloom and Anno Horribilis.'-TradeArabia News Service