World Week Ahead Focus on US, China numbers

Monday 25th June 2012

If anything became clearer in the past week it was that the path to growth remains full of obstacles that will require careful navigating to avoid any crashes.

Investors will get a slew of US data in the coming days including new home sales on Monday, consumer confidence on Tuesday, durable goods orders on Wednesday, while the latest statistics on gross domestic product and jobless claims are both on tap for Thursday.

The Federal Reserve slashed expectations for growth in the world’s largest economy for this year, and the next two, while offering less help than some had expected. Fed Chairman Ben Bernanke’s reassurance that the central bank was ready to act did little to soften the disappointment among investors.

However, the spread between yields on 10- and 30-year Treasuries shrank for a second week after the Fed said it would expand its Operation Twist program by US$267 billion to replace short-term notes in its holdings with longer-term debt.

The US Treasury is set to sell US$99 billion of new supply this week, including two-year, five-year and seven-year debt.

Helping restore some calm over the past week was the fact that Greece managed to form a government after last weekend’s elections, partly whipped into action by European Union promises of renegotiations to the raw deal that the Greeks feel they have earned under the conditions of the nation’s second international financial rescue package.

As a result, it seems that a break-up of the euro has been averted, at least for now.

On Friday, EU leaders – the big four – agreed to up their efforts to boost growth but German Chancellor Angela Merkel still isn't interested in euro zone bonds. EU leaders are scheduled to start a two-day meeting on long-term plans for a fiscal and banking union on Thursday.

“It’s quite clear that fiscal and banking unions are needed in Europe but what’s needed right now is a timeline,” Andrew Wilkinson, chief economic strategist at Miller Tabak in New York, told Bloomberg News.

While the euro advanced 0.2 percent to US$1.2570 on Friday, the single currency has slid from this year’s high of US$1.3487 on February 24 and has dropped about 6.6 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes that measure 10 developed-market currencies.

Europe's Stoxx 600 Index ended with a 1 percent gain for the week, even after a 0.7 percent drop on Friday in the wake of a decline in German business confidence, helped by the general sigh of relief about the results of Greece’s elections and the stability of the single currency.

However, Spain remains a crucial concern as the country proved yet again that it has access to financial markets as long as it is willing – and able – to pay a premium to draw enough interest.

On Monday, Spain is expected to make a formal request for money to keep its banks solvent. Euro-zone leaders have promised up to 100 billion euros in assistance.

In the past five days, the Dow Jones industrial Average shed 0.9 percent and the Standard & Poor's 500 Index dropped 0.6 percent. Bucking the trend, the Nasdaq Composite Index advanced 0.7 percent.

It was a rough week for commodities, as they suffered from the realisation that the pace of global growth is under threat from various angles with signs of easing in some of the key engines, i.e. the US, China and Europe.

Crude futures dropped 5.1 percent last week.

“The oil market is trying to decide whether or not to price in a global recession,” Mike Wittner, head of oil market research at Societe Generale in New York, told Bloomberg. “Weak economic numbers have fed those concerns.”

For the week, gold futures shed nearly 4 percent, while silver futures weakened 7 percent.

At the end of the week there's a slew of data from China: leading index, business sentiment and purchasing managers' index. There's now concern about how reliable the statistics are.

Some of the nation’s economic indicators are being inflated as local officials falsify statistics to mask the extent of the nation’s slowdown, the New York Times reported on Friday, citing company executives in China and Western economists.

Meanwhile, a potential unknown is the impact of Syria’s decision to shoot down a Turkish air force jet that flew into Syrian air space. A full-out civil war with Syria's neighbours entering the fray would not add anything positive for investors.

In the US, investors are also eyeing a Supreme Court ruling on the Obama administration's healthcare overhaul, the Affordable Care Act.

Stocks of health insurers that specialise in Medicaid programs for the poor such as Centene or Molina Healthcare could suffer if the law is struck down, while large insurers including Aetna or WellPoint might benefit, according to Reuters.

BusinessDesk.co.nz

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