World Week Ahead: Greece, UK and jobs

Monday 3rd May 2010

Hang on Dorothy, it's going to get a little windier this week.

As protests mount in Athens, the Greek government appears set to sign an agreement to start the process of putting its fiscal house in order. The question remains whether investors will be relieved or renew their run for cover. And can the euro zone withstand increased doubt about its future? The European Central Bank will hold a regular policy meeting on Thursday and its analysis of the euro zone's prospects will be very closely read.

Beyond Greece, there's a national election in the UK on Thursday and indications at this point are that the next government will be a minority one, an outcome rarely cheered by investors who interpret the lack of a majority as a sign that little will be accomplished - not a good result when the UK needs to rein in a soaring deficit.

On a bright note, more US corporate earnings - Kraft Foods Inc, Merck & Co, Cisco and Pfizer Inc, among others - will set the stage for Friday's release of the April payrolls report, which is expected to confirm that the world's biggest economy created jobs for a third time in four months. Economists polled by Reuters are betting on 200,000 new jobs last month.

Equities were roiled around the globe last week after Greece and Portugal were downgraded by S&P, and a day later Spain, and after a report that a criminal probe had begun into trading activity by Goldman Sachs Group, whose executives did little to dispel questions about the propriety of the firm's mortgage positions ahead of the global financial crisis when testifying at a US Senate hearing last week.

For the week, the Dow Jones Industrial Average dropped 1.2%, the Standard & Poor's 500 shed 2.5% and the Nasdaq Composite fell 2.7%. It was the worst week for US markets since late January - though for most of the three months in between, stocks have been steadily climbing higher, reaching 19-month peaks along the way.

The Dow Stoxx 600 fell for a third week, shedding 1.4% last month.

And yet some investors remain optimistic that the strength of earnings in both Europe and mostly America will override concerns about sovereign debts.

"I think a slow steady gain is still in the cards," Joe Benanti, managing director at Rosenblatt Securities in New York told Reuters, adding that the swings in volatility that marked last week were likely to reappear.

On Friday, the Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ surged near 20% to 22.05. A day earlier it had dropped 12.5%.

The Dollar Index, which measures the greenback against a basket of six major currencies, slid 0.16% on Friday. That came as the euro dropped 1.6% to US$1.3294. The single currency also dropped 1.2% to 124.78 yen. In turn, the U.S. dollar added 0.4% to 93.85 yen.

A loss of faith in EU policy makers has put the euro on a downward trajectory, though it could recoup some recent losses if investors take a positive view of the actual Greek rescue package.

Investors have been waiting for Europe "to do something to get ahead of the curve," Win Thin, senior currency strategist at Brown Brothers Harriman in New York, told Reuters. "I don't think it's possible anymore."

Futures traders placed the most bets on record that the euro would fall against the greenback, Bloomberg News reported.

The number of wagers by hedge funds and other large speculators for a decline in the euro rose to 89.013 contracts more than those anticipating a gain as of April 27, compared with 71,424 a week earlier, Commodity Futures Trading Commission data showed.

From a technical perspective, traders told Reuters that the next key level for the euro is US$1.31 and if the currency breaks through that level, it could drop toward US$1.29 and lower.

"Significantly more downside can be expected," James Chen, chief technical strategist at FX Solutions in New Jersey, told Reuters.

The euro's woes has helped US Treasuries advance as suddenly US debt is being seen as safer in the context of the euro zone's lingering woes.

The yield on the 10-year US Treasury not fell 6 basis points to 3.67% on Friday, according to BGCantor Market Data. The yield fell 15 basis points last month. The yield on the two-year note fell to 0.96% in April.

Barclays Plc is forecasting that the duration of its US Treasury Index will rise by 0.6 years, the smallest extension this year. Duration measures price sensitivity to changes in yield, and is partly a function of maturity.

On Friday, the Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 0.88%.

Businesswire.co.nz

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