World Week Ahead Relentless headwinds

Monday 4th March 2013

Investors will eye February's jobs report on Friday for fresh signs that the US economic recovery remains on track despite a range of headwinds - including the budget-cut debate in Washington and the political impasse in Rome.

Wall Street keeps flirting with record highs but investors seem hesitant to push stock valuations substantially higher.

In the past week, the Dow Jones Industrial Average gained 0.6 percent, moving within 1 percent of its record set in October 2007, while the Standard & Poor's 500 Index advanced 0.2 percent. So far this year, the Dow is up 7.5 percent, the S&P 500 has added 6.5 per cent and the Nasdaq Composite Index has risen 4.9 percent.

The market "still has a bias to the upside," Bill Schultz, chief investment officer who oversees about US$1.1 billion at McQueen Ball & Associates, told Bloomberg News.

Indeed, investors took comfort in data showing better-than-expected strength in US manufacturing, consumer confidence and housing, as well as in Federal Reserve Chairman Ben Bernanke's assurances that the bank's stimulus measures won't dry up any time soon.

In his annual investment letter to shareholders released after the closing bell on Friday, Warren Buffett said Berkshire Hathaway is struggling to perform because the overall US equities market is rising so fast.

"To date, we've never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch," he wrote. "But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five-year wins will end."

Buffett is hardly downbeat, nor is the outlook necessarily negative for Berkshire. The reality is that the company has about US$47 billion of cash and Buffett and his cohort Charlie Munger are finding it harder to put that money to work. But Buffett said the two managers "have again donned our safari outfits and resumed our search for elephants."

As this week progresses, eyes will be firmly on the latest employment report, which is expected to show the US economy added 160,000 jobs in February, while the unemployment rate held steady at 7.9 percent.

Further clues on the American economy will come in the form of the ADP employment report and factory orders, both due Wednesday, international trade, due Thursday, and wholesale trade, due Friday. The Fed releases its beige book on Wednesday.

In Europe, European Central Bank chief Mario Draghi also has stressed that there was no reason to end accommodative policy. Indeed, data showed euro-zone unemployment rose to a record 11.9 percent in January.

Policy makers at both the ECB and the Bank of England are scheduled to gather this week. The most recent Reuters polls showed a rising minority of economists expect the ECB to cut eventually its key lending rate, now at 0.75 percent, to a record low of 0.5 percent.

As for Britain's top banks, expectations are increasing for a boost of its stimulus measures. Citigroup, ING Bank and BNP Paribas are among banks predicting a 25 billion-pound increase in quantitative easing on March 7, according to Bloomberg News, though the median of 39 economists is for the target to remain at 375 billion pounds.

Expectations of help from central banks may need to be reassessed as officials make it clear there's a limit to what they can do to bolster growth. On Saturday, the ECB's Benoit Coeure added his voice to that discussion, telling an audience at Harvard University that it's time for lawmakers to act.

"The central bank can buy time for political bodies to act, but it cannot buy enough time for them not to act," according to a copy of Coeure's speech. "Yet buying time is not indefinitely affordable. There is a cost to any delay in reforms."

Europe's benchmark Stoxx 600 Index added 0.2 percent in the past five days. The euro, however, weakened 1.3 percent against the greenback last week.

BusinessDesk.co.nz

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