World Week Ahead: EU rattles the globe

Monday 21st May 2012

Not even Facebook, the most anticipated initial public offering in the last year, could dodge the virus known as the euro debt crisis and there’s no sign yet of a new or more intense course of treatment.

In fact, EU officials appear to be signalling a determination to do as they have been doing. “We will do whatever is needed to guarantee the financial stability of the euro zone,” European Council President Herman Van Rompuy said, speaking at Camp David, the presidential retreat outside Washington. But no major new approach is planned, he added.

EU leaders, however, will meet for dinner in Brussels this week, on Wednesday, to discuss how to bolster growth ahead of a summit next month.

Financial markets remain unimpressed and risk aversion is rising for good reason: Greece is heading to fresh elections next month and a potential ‘Grexit from the euro, while Spain’s finances appear to be spiralling out of control.

The failure of Facebook’s shares to end markedly higher after debuting on the Nasdaq on Friday was the surest sign yet that optimism has given way to wariness, if not outright pessimism.

Volatility is returning with a vengeance too, even though it is at the lower end of the scale. The Chicago Board Options Exchange SPX Volatility Index, or Wall Street’s fear gauge, is 44 percent higher than a year ago and is now at its highest since December.

On Friday the Standard & Poor’s 500 Index fell for a sixth straight day and recorded its worst week since November on growing concerns that global growth will suffer from the euro zone’s problems and signs of a slowing US recovery.

For the week, the Dow Jones Industrial Average fell 3.5 percent, the S&P 500 declined 4.3 percent and the Nasdaq was down 5.3 percent.

“We sort of hit an air pocket in terms of positive catalysts and meanwhile Europe keeps weighing on the market,” John Kattar, chief investment officer at Eastern Investment Advisors in Boston, told Bloomberg News.

Last week wasn’t much better for shareholders in Europe either, with banks pacing stocks lower. The UK’s FTSE 100 declined 5.5 percent. France’s CAC 40 lost 3.9 percent and Germany’s DAX slid 4.7 percent. Greece’s ASE Index plunged 10 percent.

Meanwhile, the euro declined for the third straight week against the greenback, dropping to the weakest level in four months on Friday, while falling for the fourth week against the Japanese yen, according to Bloomberg.

"This whole European situation has been managed via crisis," Didier Saint-Georges, a member of the investment committee of Carmignac Gestion, told Reuters. "You only make progress each time after getting pretty close to the cliff."

And another cliff is fast approaching. Oil has been suffering as a result of concern about the economic outlook, too, with crude shedding 4.8 percent in the last week.

Purchasing managers' data are due this week for France and the euro zone, and no good news is pending. Germany is working hard to offset the weakness everywhere else in the region but there are limits.

The influential German Ifo survey of business sentiment for May, also due on Thursday, will provide further clarity on whether Germany is at risk of losing momentum because of the crisis, Reuters reported.

In the US, earnings season is over but for some stragglers. There will be some economic data but it’s unlikely to be significant enough to alter bets on how the recovery is faring. There will be April's existing home sales on Tuesday and new homes sales figures are due on Wednesday. On Thursday, there are initial jobless claims and durable goods orders.

BusinessDesk.co.nz

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