World Week Ahead Central bankers go for gold

Monday 30th July 2012

All eyes will be on the US Federal Reserve and the European Central Bank in the coming days as investors await further clues on action to bolster economic growth and contain the euro zone crisis.

ECB policy makers gather on Aug. 2, a day after the Federal Open Market Committee finishes its two-day meeting. Bank of England board members also are set to meet on Thursday.

Last Thursday, ECB president Mario Draghi said the central bank will do "whatever it takes" - within its mandate - to preserve the euro. Draghi is reported to be canvassing European central bankers on their support for bond purchases.

Last week, Spain's 10-year yield fell 52 basis points to 6.74 percent, the biggest weekly drop since Dec. 2, according to Bloomberg News, as the nation appeared closer to asking for a full bailout. The yield respite may prove temporary without concrete action by the ECB.

"What these extreme euro government yields are telling us is there's no single money in the euro zone. You can't have a single currency where 50 percent of the members are paying near zero for funds and 50 percent are paying more than four or five percent," Ewen Cameron Watt, portfolio manager and chief investment strategist at Blackrock Investment Institute, told Reuters.

"To the extent the ECB is the provider of the single currency, it's tremendously important it does something now about this 'Balkanisation' of the euro zone. That's precisely what Draghi's getting at and we shall see [this] week."

Both Spain and Italy are holding debt auctions in coming days. Italy will sell up to 5.5 billion euros of notes due from 2015 to 2022 on Monday, while Spain is offering two-year, four-year and 10-year paper on Thursday.

"The market has taken a glass half-full view of the promise of action in the wake of Draghi's comments [Thursday], which has seen an ongoing, marked rally in peripheral debt and should therefore provide some significant degree of support as regards to these particular auctions, assuming that we do not get any conflicting rhetoric in the interim," Richard McGuire, senior fixed income strategist at Rabobank, told Reuters.

Germany and Belgium are also selling debt this week.

In the past five days, the Dow Jones Industrial Average rose 2 percent, while the Standard & Poor's 500 Index climbed 1.7 percent. Europe's Stoxx 600 Index posted a 0.6 percent gain for the week.

The euro also had a good week, rising 1.4 percent to US$1.2322 in the past five days in New York.

AIG, Procter & Gamble, Kraft Foods, Pfizer, MasterCard and General Motors are among the US companies reporting quarterly earnings this week.

While about two thirds of the 290 companies in the S&P 500 index that have reported so far have surpassed expectations, the outlook for the next quarter has deteriorated.

US third-quarter earnings are now forecast to fall 0.4 percent from a year ago, compared with an expected increase of 1.4 percent last week, according to Thomson Reuters data.

UPS, McDonald's, Apple and Facebook were among the companies that last week reported earnings that fell short of expectations. Shares in Facebook fell to a fresh record low on Friday amid investor wariness about the outlook for the social network. Last week's decline in the shares of Apple, in contrast, was mostly seen as a buying opportunity ahead of the release of the latest iPhone model later this year.

Meanwhile, there were more signs that the world's largest economy is cooling. Gross domestic product grew at a 1.5 percent annual rate in the second quarter after a revised 2 percent gain in the prior quarter, according to Commerce Department data on Friday - slightly higher than expectations but still a worry.

At least it was better than the contraction of the UK economy for the third straight quarter.

BusinessDesk.co.nz

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