World Week Ahead: Eyes on ECB

Monday 2nd July 2012

The month of June finished on a high note, with investors opting to trust that the most recent agreement by European leaders on dealing with the 2 1/2-year-old sovereign debt crisis will finally stem the bleeding for both the region's and the global economy.

The European Central Bank this week might help sustain the momentum of optimism by opting to ease interest rates, already at a record low. Most economists polled by Reuters expect the central bank to lower borrowing costs at its meeting on Thursday.

Investors will closely watch for the latest indicators on the strength of the US economy including the Labor Department's report on nonfarm payrolls in June, due on Friday, though expectations are low.

Economists polled by Reuters forecast an increase of 90,000 jobs and the US unemployment rate holding steady at 8.2 percent. Estimates in a Bloomberg survey of 59 economists ranged between 35,000 and 165,000 more jobs.

Other US data due in the coming days include the Institute for Supply Management's manufacturing index and construction spending on Monday, as well as weekly jobless claims and mortgage data, ADP's private-sector payrolls report and the ISM's services-sector index on Thursday.

“We really need to see job creation pick up, which is the only thing that’s going to get households spending on a sustained basis,” Paul Dales, a senior US economist at Capital Economics in London, told Bloomberg News. “The economy isn’t going to get exceptionally weak from here, but neither is it going to get much stronger.”

Wall Street will be closed on Wednesday, the Fourth of July, in observance of Independence Day.

In the past five days on Wall Street, the Dow Jones Industrial Average advanced 1.9 percent, the Standard & Poor's 500 Index gained 2 percent, while the Nasdaq Composite Index rose 1.5 percent.

For the month of June, the Dow gained 3.9 percent while the S&P 500 climbed 4 percent and the Nasdaq added 3.8 percent.

In Europe, the Stoxx 600 Index posted a gain of 1.9 percent for the week, as national benchmark indexes advanced in all 18 western European markets. London rose 1 percent, Paris increased 3.4 percent and Frankfurt moved 2.4 percent higher in the past five days.

Some analysts warned that the optimism and the gains might be short-lived.

"Investors have to be cautious because the market may be getting ahead of itself. We really don't have any details. The big question is still what direction the ECB takes [this] week," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, told Reuters.

On Friday, euro-zone leaders agreed to allow their joint emergency funds to be tapped by the region's banks, aimed at reducing the pressure on sovereign debt. They also pledged to create a single banking supervisor for euro-zone banks based around the ECB in a move toward a European banking union.

"[The EU deal] is certainly not a silver bullet for the debt crisis, but the market is kind of acting like it is. It may set us up for another push down in the weeks ahead," Esiner said.

Others agreed. "People had pretty low expectations of the summit and are a little bit more optimistic now,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group, told Bloomberg News. “The devil is in the details on most of this stuff.”

In the coming days, Spain and France will test investors' appetite for their debt again.

Spain is set to auction three-year, four-year and 10-year bonds on Thursday, the same day as France who is planning to sell between 7 billion and 8 billion euros in long-term bonds.

BusinessDesk.co.nz

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