World Week Ahead: Dancing a jig

Monday 22nd November 2010

The fiddler's cadence has accelerated and the dancer's feet have responded in kind - and another round of Guinness is being drawn.

Fears that Ireland was about to fall off a financial cliff have subsided first because the Irish government is showing a willingness to accept help and second because its euro-zone partners have responded with immediate offers of assistance.

The Irish government is expected to detail on Tuesday, according to a newspaper report, a four-year plan to bring its finances back into line, and a financial aid package, worth at least 50 billion euros, is expected to follow soon after. The size of the aid package is still being debated but the swiftness of the government's move and the euro zone's too is a huge positive for investors.

Investors also seem to be less worried about China, taking in stride the latest effort by local authorities there to rein in growth and ease it back to a more moderate rate. It's why economists are beginning to prepare investors for the next logical step - higher interest rates.

Good news - at least far less dire news - also is emerging on the state of the world's biggest economy and just in time for Thanksgiving, which will close Wall Street on Thursday and in a holiday mode on Friday.

Most importantly, this week ends with Black Friday, the biggest day of the year for US retailers including Target. The retail sector has huge hopes for a strong rebound in consumer optimism and a spending spree to spur sales through the final weeks of the year.

"Bullish sentiment toward holiday sales is the most likely catalyst for the cyclical bull market to resume, so a lot rests on that," Chris Burba, short-term market technician at Standard & Poor's in New York, said. If sales seem weak, "this dip could turn into something bigger."

Last week, the US benchmark stock indexes were steady, following a decline the previous week. The Dow Jones industrial average rose 0.1% and the Standard & Poor's 500 index edged 0.04% higher. The Nasdaq Composite index, barely budged, losing 0.004%.

The S&P 500 has had trouble staying above 1,200 and ended just below that level on Friday.

A break above the mark, however, "would be a good sign," signaling bullish momentum, Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, said.

The Stoxx Europe 600 Index mirrored concerns held by US investors, declining 0.3% for the week, extending a 0.7% drop in the previous five days.

Rather than a dip, investors hit pause, and increasingly it appears that markets should rally into the New Year.

That's primarily because the US economy has been showing plenty of signs that the pace of recovery is gaining traction and the question remains whether the Federal Reserve’s most recent US$600 billion stimulus package will need to be carried out completely.

This Tuesday investors can scrutinise the minutes from the Fed's latest policy-setting meeting in which officials discussed the decision to purchase more bonds to bolster the economy.

Fed Chairman Ben Bernanke and his colleagues have been working overtime in the last week to make it clear that their decisions have been correct, not just for the US, but also the world, dismissing critics in Asia and Europe.

On Friday, the greenback gained against 10 of its 16 most-traded counterparts. Intercontinental Exchange's Dollar Index, used to track the currency against those of six major US trading partners including the euro and yen, rose for a second week. Bloomberg reported.

One currency that gained against the US dollar was the euro, though that move may prove premature.

Avery Shenfeld, senior economist at CIBC World Markets in Toronto, said that he advised caution toward the euro as Spain and Portugal's debt troubles posed similar, if not larger, problems to that of Ireland for the EU.

He said Spain could need a much larger backstop loan if it failed to hit its deficit targets.

"All good reasons why, at least until the dust settles, it's worth paring positions in the euro," Shenfeld said.

On the economic front this week is the US government's second estimate of third quarter gross domestic product growth and two reports on the American housing market.

By the end of the week, more than just Irish eyes may be smiling.

BusinessDesk.co.nz

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