World Week Ahead More FX volatility ahead

Monday 18th February 2013

Economic growth worldwide, deemed "still too weak", remained a key concern at a two-day meeting of Group of 20 finance ministers and central bank governors, which stopped short of asking countries to refrain from targeting exchange rates.

As central banks of the US, Europe and Japan have stepped in to help revive their economies by effectively weakening their currencies, other countries are paying the price as their exports become more expensive, prompting concern about global currency wars.

"We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes," the G20 said in a statement released after a two-day meeting in Moscow.

In practical terms that means Japan can continue its efforts to try to boost its moribund economy with policies that have already weakened the yen by 20 percent.

"The market will take the G20 statement as an approval for what it has been doing -- selling of the yen," Neil Mellor, currency strategist at Bank of New York Mellon in London, told Reuters. "No censure of Japan means they will be off to the money printing presses."

On Monday, Wall Street is closed for the President's Day holiday.

In the past five days, the S&P 500 gained 0.1 percent. The Dow Jones Industrial Average and the Nasdaq Composite Index both slipped 0.1 percent.

After racing higher in January, stock market gains have been more tempered with a chorus of market watchers calling for a pullback.

"At this point, it just looks like the market may be interested in pausing and pondering," John Stoltzfus, chief market strategist at New York-based Oppenheimer & Co, told Bloomberg News. "Perhaps even a modest downside bias while we look to the March 1 deadline in Washington."

The deadline refers to the day when automatic spending cuts are poised to take effect. This is the fiscal can that was kicked down the road from the end of last year. At this point it seems inevitable that at least some cuts will proceed as Republicans and Democrats remain as divided as ever on how to balance the budget.

The holiday-shortened week offers various reports on the state of the US real estate sector, including the housing market index, due Tuesday, housing starts, due Wednesday, and existing home sales due on Thursday.

Other data due include the producer price index, due Wednesday, followed by the consumer price index, the PMI manufacturing index, the Philadelphia Fed survey and leading indicators, all due on Thursday.

While a report on Friday showed that American consumer confidence climbed to a three-month high in February, Wal-Mart sales indicate that shoppers are keeping their purse strings tight.

"In case you haven't seen a sales report these days, February MTD sales are a total disaster," Jerry Murray, Wal-Mart's vice president of finance and logistics, said in a February 12 email obtained by Bloomberg News to other executives, referring to month-to-date sales. "The worst start to a month I have seen in my 7 years with the company."

Wal-Mart is scheduled to report its latest quarterly earnings on Thursday.

Overall, US earnings have been better than expected, though expectations were low. Year-over-year profit growth for S&P 500 companies is now estimated at 5.6 percent, up from a January 1 forecast for 2.9 percent growth, and 70 percent of companies are exceeding analyst profit expectations, above the 62 percent long-term average, according to Thomson Reuters data.

In Europe, the benchmark Stoxx 600 Index ended unchanged for the week. The index shed 0.8 percent the previous two weeks, though is up 2.7 percent this year, according to Bloomberg.

Investors will eye the European Commission's Winter Forecast for the region on Friday. A report last week showed that the euro-zone economy contracted more than expected in the fourth quarter, as gross domestic product dropped 0.6 percent from the third quarter.

As Italians are gearing up for elections next weekend, on February 24 and 25, the outcome is hard to predict as the most recent opinion polls indicated that former prime minister Silvio Berlusconi was closing in on Pier Luigi Bersani's leading coalition.

BusinessDesk.co.nz

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