World Week Ahead: Global growth worries

Monday 24th May 2010

Investors are preparing for more volatility in the coming days, adjusting to what seems to be the new normal, amid heightened worries that the outlook for global economic growth has dimmed.

Concerns that Greek’s fiscal woes will spread to other euro-zone countries has weighed on global assets, exacerbated by concern that fiscal tightening measures to combat the crisis would stall the economic recovery worldwide.

European Union finance ministers said they planned to stiffen sanctions on high-deficit countries and that no euro country would be allowed to renege on its debts.

“We will provide new sanctions, more than is now provided,” EU President Herman Van Rompuy said after a four-hour brainstorming session in Brussels on Friday, according to Bloomberg.

US Treasury Secretary Timothy Geithner will make a stop in Britain and Germany next week to discuss the troubled economic conditions there en route home from China.

"Of course, there is no quick fix to the debt crisis, but the visit is at a good time. We don't know what will come out of the meetings, but it will probably be some sort of a coordinated effort to address the liquidity issue in Europe," Jeff Kleintop, chief market strategist at LPL Financial in Boston, told Reuters.

Investors will eye US jobless claims data on Thursday, and April’s new home sales on Wednesday. The number of US workers filing new applications for unemployment insurance unexpectedly rose in the week ended May 14.

The increase was the first since early April, dealing a blow to hopes for the labour market. April's new home sales data is expected to extend the gains of March as buyers were spurred by an impending tax credit deadline. Sales are seen rising to 420,000 units in April from 411,000 in March. Against this backdrop, volatility has become the norm for equities.

For the week, the Dow Jones Industrial Average lost 4%, the Standard & Poor's 500 was down 4.2% and the Nasdaq Composite lost 5%. On a positive note, Wall Street staged a late rally on Friday as unease about new financial regulations in the US lessened.

On Friday, the Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ dropped 12.4% to 40.10. It reached 48.20 earlier on Friday, the highest level intraday since March 9, 2009. The VIX has been rising and falling by double-digit percentages every few days.

The Stoxx Europe 600 Index fell 4.6% to its lowest level in more than six months, as all 19 industry groups dropped. That brings the losses from this year’s high on April 15 to 13%. The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.75% on Friday.

The euro gained for a third straight session on Friday after German lawmakers approved their country's contribution to a nearly US$1 trillion bailout package and amid renewed talk of central bank intervention.

"With the immense amount of short positions in the market and EU leaders rushing to put together a lasting remedy, the euro has certainly found its footing," Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut, told Reuters.

In late New York trading on Friday, the euro rose 0.9% to US$1.2575, ending the week higher against the US dollar after five weeks of losses. The US dollar rose 0.4% to 89.91 yen.

On Friday, the gap between yields on US Treasury 2- and 10- year notes, known as the yield curve, flattened to the lowest level in six months, according to Bloomberg News. The yield on the 10-year US Treasury note was little changed at 3.22%. The 2-year note yield increased 4 basis points to 0.75%.

The London interbank offered rate, or Libor, for such loans rose for a ninth straight day to 0.497% on Friday, the British Bankers’ Association said. That’s the highest since July 24.

The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to the most since August 7. Copper rebounded on Friday, while both gold and oil slid. The Reuters/Jefferies CRB Index, which tracks 19 raw materials, ended up 0.54%.

The economic outlook in Europe and measures to curb loan growth in China appeared set to limit demand for commodities, particularly base metals, Aberdeen Asset Management Plc’s portfolio manager James Carver told Bloomberg News. “We are wary of being too bullish in the medium term.”

Copper futures for July delivery climbed 11.65 cents, or 4%, to US$3.061 a pound in Friday trading on the Comex in New York, the biggest gain for a most-active contract since February 16. Spot gold was bid at US$1,177.35 an ounce at 1842 GMT on Friday, against US$1,181.10 late in New York on Thursday.

The slide on Friday capped the precious metal’s worst weekly performance in almost 15 months. Investment demand for physical gold continued to be firm. Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, hit a record 1,220.152 tonnes on Thursday.

Platinum and palladium recovered sharply from losses that took them to 3-1/2 month lows, but still ran their biggest weekly percentage loss since late 2008. In its closely watched Platinum 2010 report, platinum refiner and specialist Johnson Matthey Plc said it expected demand to strengthen as global auto production recovers this year and again in 2011.

Crude prices have fallen in eight of the last nine trading days, and have dropped from a 2010 high near US$90 a barrel in early May. On Friday, front-month US crude futures fell 76 cents to settle at US$70.04 a barrel. London Brent crude closed down 16 cents at US$71.68 a barrel.

Businesswire.co.nz

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