World Week Ahead: Greece, Spain and the fiscal cliff

Monday 19th November 2012

The focus remains squarely on mountains of debt and fiscal, as well as profits, and the fiscal cliff this week.

The new normal is in danger of becoming very repetitive as the key themes continue to revolve around the questions of when Greece will get more financial aid, when Spain will ask for a bailout and will US political leaders pull back from the fiscal cliff.

While the consistency of the themes is good, the reality of each one-combined-is why investors continue to be on the defensive. The rate of uncertainty is perceived to be high with so many key variables that could impact the outlook.

And that is reflected in equity valuations, which have also been hammered by weak third-quarter corporate earnings in both the US and Europe.

By now, Wall Street's once double-digit year-to-date rises have shrunk to less than 8 percent, while German equity gains of more than 25 percent have slipped into the teens, according to Reuters, as third-quarter Standard & Poor's 500 earnings were little changed from a year ago.

"Despite the upside economic surprises, profits have been spiralling downwards," Societe Generale's Albert Edwards told Reuters. "It's not the impending fiscal cliff the market is worrying about, it's the actual profits cliff we have already fallen off."

Indeed, the rate at which earnings estimates are being downgraded suggests a profit recession has begun, that consensus forecasts of 12 percent next year are optimistic and-just like in 2008-the economic data would follow suit, according to Edwards.

In this Thanksgiving holiday shortened week in the US, stocks may enter into somewhat of a holding pattern. Wall Street will be closed on Thursday and markets will close early on Friday with many traders taking an extended break starting as early as Wednesday.

Last Friday, the Dow Jones Industrial Average rose 0.37 percent to 12,588.31, the S&P 500 gained 0.48 percent to 1,359.88 and the Nasdaq Composite Index climbed 0.57 percent to 2,853.13. That positive activity though wasn't enough to offset several recent weeks of wariness. In the past five days, the Dow shed 1.8 percent, falling for a fourth week. The S&P 500 slid 1.5 percent, its second week of losses.

There's good reason to be wary. Last week brought confirmation that the euro zone has fallen back into recession. And, if US political leaders can't compromise, the world's biggest economy could contract early in the New Year as consumers and businesses slam their spending brakes at the same time as taxes rise and the government is forced to cut back.

Treasury Secretary Timothy Geithner, for one though, is confident an agreement can be reached soon.

"It was a good meeting, and the tone was very good," Geithner told Bloomberg in an interview after White House talks between President Barack Obama and congressional leaders ahead of the weekend. "I think this is doable within several weeks."

In the next few days, the focus will be on more economic data from around the world.

In the US, there are reports on durable goods, house prices, consumer confidence, new home sales and GDP. And the weekly jobless claims numbers.

Eyes will also be on the November 20 meeting of euro zone finance ministers who will talk about the financing of a two-year extension of Greek budget targets; Germany is adamant that European taxpayers who have lent to Greece should not foot that bill.

International Monetary Fund chief Christine Lagarde has expressed dismay at the prospect of a two-year delay.

"I am always trying to be constructive but I am driven by two objectives," Lagarde told Reuters in an interview on Saturday, "to build and approve a program for Greece that is solid, that is convincing today, that will be sustainable tomorrow, that is rooted in reality and not in wishful thinking."

The Bank of Japan is scheduled to hold a policy meeting this week-and while policy may be on hold for the moment, there is increasing pressure on the central bank to ease in order to diminish the appeal of the yen, which is causing increasing havoc among the nation's exporting sector.

Panasonic, which shed 36,000 jobs from its payroll last financial year, last week said it expects to eliminate another 10,000 positions by late March as it struggles to rein in costs and return to profitability.

The yen has weakened 6.9 percent this year, the most out of its major peers, according to the Bloomberg Correlation- Weighted Indexes, which track 10 developed-nation currencies. The euro has been the second-worst performer, shedding 2.8 percent.

BusinessDesk.co.nz

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