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Global markets rally a dead cat bounce?

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After days of slipping, and erasing some $3 trillion in value, the world's markets are witnessing a bounce. While some analysts have said this rally will continue for a little while, others have said this is more like the calm before the storm.

World stocks fought their way back into positive territory for the first time after the U.K. voted to leave the European Union (EU) last week, sending markets sliding into a sea of red. Currency volatility was seen at its highest with dramatic moves in sterling from $1.50 to a 31-year low of $1.32. While it continues to remain under pressure, sterling has clawed its way back into positive territory, trading more than 1 percent percent higher above $1.33.

Joe Rundle, head of trading at ETX Capital called this rally a dead cat bounce - a temporary recovery in prices as speculators try to cover their trades - in his latest research note.

"Sterling has rallied a little overnight but the margin is small compared to the 10 percent fall in cable since Friday. The FTSE 100 has also opened higher today but the mood is fragile and as fund managers start to flex their muscles there could be a long way to fall. This looks like a classic dead cat bounce."



He further explained that the rating downgrade from all three ratings agencies - Standard & Poor's, Fitch and Moody's - is the first real sign that the Brexit vote has serious real world repercussions for people's finances.

Fitch ratings is the latest in the list to downgrade the UKs credit rating from AA+ to to AA, after similar moves by Moody's and S&P, following Britain's vote to leave the EU.

A number of analysts have said that the rally in markets this morning is temporary and when markets start to realise that the U.K. has no government and no plan for the future, the slump will start again.

"The negative economic implications for the U.K. economy leaving the EU are clearly understood but there is plenty of willingness to downplay the impact on the rest of Europe let alone the rest of the world," Kit Juckes, strategist at Societe Generale said in a research note.


Stocks across various sectors saw a rally at the Europe open on Monday. The most surprising was the banking sector which has seen a massive blow in the last few days with shares of big banks like the Royal Bank of Scotland, Barclays and Lloyds in a free-fall mode and Deutche Bank and Credit Suisse hitting new lows. However, the banking sector was one of the top performers at the open on Tuesday with banking stocks slowing trying to reverse losses. But is this rally sustainable?

"We expect domestically focused stocks that source most of their revenues from the U.K. to continue to underperform firms which source more of their revenues from outside the UK," Mike Bell, Global Market Strategist at JPMorgan Asset Management told CNBC via email, adding that headline equity indices are likely to be choppy as events unfold given the uncertainty.

David Dali, a client portfolio strategist at Matthews Asia says this uncertainty will continue to drive markets lower for some time.

"Risk-off sentiment could continue in the short term and because Brexit negotiations are expected to extend for many months, a period of ongoing uncertainty will keep markets unsettled for quite some time."

Meanwhile, financial markets across the world are also eyeing the ongoing negotiations in Brussels where pressure is expected to be applied on the U.K. to start the process of leaving the EU. Prime Minister David Cameron is expected to attend the summit later on Tuesday which hopefully will provide some clarity to the markets on the way forward.