World Week Ahead: Correction chatter

Monday 12th November 2012

As markets swoon in the wake of the US presidential election and as the fiscal outlook in both the US and the EU remains clouded, investors appear set to leap to the sidelines.

In the past five days, the Dow Jones Industrial Average dropped 2.1 percent, the Standard & Poor's 500 Index shed 2.4 percent, and the Nasdaq Composite Index fell 2.6 percent. All 10 of the S&P 500's industry groups fell last week.

"There's a technical breakdown in the market that indicates further losses," Adam Sarhan, chief executive of Sarhan Capital in New York, told Reuters . "A 10 percent drop is the next big line in the sand."

It won't help investors' nerves to have a short week for trading after having lost two days when Hurricane Sandy swamped the US East Coast. Wall Street is closed on Monday for the US Veteran's day holiday.

As Sarhan noted, there's good reason for chatter about a potential correction. The S&P 500 has been trading in a range between the 50-day moving average of 1,433.50 and the 200-day moving average of 1,380.98 for about two weeks; a significant break below that lower level could be a precursor to further weakness, according to analysts.

One reason for the pall over Wall Street is continuing mixed corporate signals. Shares of Walt Disney and Groupon were among those that got hammered because of disappointing results last week: slowing sales growth is a worry about what the next few quarters may bring.

With results in from 449 of the S&P 500 companies, third-quarter earnings now are estimated to have declined 0.3 percent from a year ago, which is slightly better than the forecast at the start of the reporting period, according to Reuters. Only 38 percent of companies have surpassed expectations for third-quarter sales, Thomson Reuters data showed.

Earnings due this week include Wal-Mart and Home Depot.

Economic indicators poised for release in the coming days include the producer price index, retail sales, and consumer price index.

Also pending are the minutes from the latest FOMC meeting. In the statement released on October 24, the committee said it was "concerned" that the economy wasn't expanding fast enough to bolster the jobs market. "Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."

Among those risks is the lingering debt crisis in Europe, which shows no sign of abating and may be set to deepen as the EU's economy heads south. The euro zone's gross domestic product contracted 0.1 percent in the third quarter, economists in a Bloomberg survey forecast before data due November 15. The economy shrank 0.2 percent from April through June after stagnating in the first quarter.

In Europe, the Stoxx 600 Index suffered a 1.7 percent decline in the past five days. The euro weakened against the Japanese yen and the greenback last week, sliding 2.1 percent and 0.9 percent respectively in the past five days.

While Greek politicians will vote today on the country's 2013 budget -- which includes more austerity measures, it may be several more weeks until Greece's international lenders transfer fresh bailout funds. EU finance ministers await a report on the country's compliance with bailout terms.

BusinessDesk.co.nz

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