World Week Ahead: Euro talks, US earnings dominate

Monday 23rd January 2012

A slew of US earnings and meetings of Federal Reserve policymakers as well as European Union finance ministers will help set the mood in coming days.

Last week was by and large a positive one that confirmed recent trends; earnings by a majority of US companies have exceeded expectations, economic indicators confirm a sustained mild upswing in the world's largest economy and Europe's getting the benefit of the doubt on its efforts to resolve its debt crisis as bond yields fall.

Europe's Stoxx 600 gained 2.7 percent the last five days. Wall Street advanced too, with the Standard & Poor's 500 Index climbing 2 percent and the Dow Jones Industrial Average rising 2.4 percent.

Talks between Greece and its private creditors about a debt swap plan needed to stave off the country's default have not yet resulted in agreement.

It is unlikely that a deal can be clinched before a key meeting Monday of euro zone finance ministers, Reuters reported over the weekend, citing unnamed sources close to the negotiations.

European Union finance ministers are set to discuss the latest draft of a fiscal pact aimed at stemming the debt crisis by tightening the rules on budget deficits.

The euro had a good week, climbing 2 percent to US$1.2931, as France and Spain attracted solid demand for new debt, lowering borrowing costs a week after Standard & Poor's downgraded their credit ratings and those of seven other euro-zone countries.

Still, analysts remain cautious.

"The euro remains a very vulnerable currency,” Jane Foley, a senior currency strategist at Rabobank International in London, told Bloomberg News. "There is still an awful lot to be done in Greece. Politically, nothing has changed since last year, and there’s still a lot of pain to come. I am still quite wary about this upside we’ve seen in the euro.”

In the US, earnings have been positive though mixed. Of the 51 companies in the S&P 500 that reported results since January 9, 33 reported per-share earnings that beat projections, Bloomberg data shows.

Last week, financial shares received a boost as Morgan Stanley, Bank of America, Wells Fargo and Goldman Sachs Group all exceeded expectations. Even so, those of Citigroup disappointed.

On Friday, General Electric reported fourth-quarter revenue that fell short of expectations though International Business Machines provided an outlook that pleased investors.A further deluge of reports is due this week.

On Monday those set to report include Texas Instruments and Halliburton, followed on Tuesday by Apple, Johnson & Johnson, McDonald's, and Yahoo!.

"Risk aversion is declining, and the wild swings between 'risk on' and 'risk off' trades that we've seen over the past year should slowly fade away sometime this year," Franck Nicolas, head of global asset allocation at Natixis AM, told Reuters.

The Fed's policymakers will meet for the first time this year, starting a two-day session on Tuesday. The Federal Open Market Committee will release its policy statement on Wednesday. It will also release, for the first time, interest-rate forecasts.

Data released on the US economy this week will include pending home sales, the initial reading on fourth-quarter growth and the final January reading on consumer sentiment from Reuters and the University of Michigan.

GDP rose at a 3 percent annual rate in the final three months of 2011 after advancing 1.8 percent in the previous quarter, according to the median forecast of 64 economists surveyed by Bloomberg News.

(BusinessDesk)

BusinessDesk.co.nz

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