World Week Ahead: Bulls take the horns

Monday 14th June 2010

Patience and a keen sense of timing is what will make the difference in most World Cup matches in the month ahead, and the same is true for financial markets this week.

After weeks - months - of volatility, the semblance of calm is returning.

The focus however remains the same: is Europe’s debt crisis in check and is the US economic recovery on track?

The three major U.S. stock indexes edged higher on Friday and posted solid gains for the week. The Dow Jones industrial average was up 2.8%, the S&P 500 up 2.5% and the Nasdaq Composite Index up 1.1%.

Last week marked the S&P 500’s best since March, after National Semiconductor Corp spurred a rally in technology shares that helped the market overcome the largest drop, an unexpected one too, in American retail sales since September.

Equities were also bolstered by U.S. Federal Reserve comments said it would act as needed to support the recovery and as economic reports from Japan to Australia reassured investors that the global economic recovery was intact.

On Wednesday, Fed Chairman Ben Bernanke will speak on financial reform and once again any mention of how he sees the economy tracking will be duly noted. Last week his comments that the recovery appeared to be on solid footing and that he expected the economy to keep expanding bolstered equities.

Among the handful of U.S. companies scheduled to report financial results this week are Best Buy Co and FedEx Corp.

Investors have been concerned for weeks about Europe’s debt problems, in particular those in Greece, Spain and Hungary. Spain’s successful sale of bonds last week has eased the worry about contagion.

“Investors are confident when money is put on the table and that’s what happened this week with the debt auction in Spain,” Alan Lancz, president of Alan B. Lancz told Bloomberg News.

On Friday, an official said the European Union had reached agreement with Greece on how to move forward with pension reform. And the UK government got a minor reprieve with news that the British economy expanded 0.6% in the three months through May.

On Friday the Stoxx Europe 600 Index rose 2% for the week.

Investors will closely eye the pace of recovery in the US housing sector this week, still deemed fragile with the expiration of a federal tax credit for home buyers.

US housing starts and building permits for May will be released on Wednesday. Economists polled by Reuters forecast that housing starts will slip to an annual pace of 650,000 units in May from April's pace of 672,000 units.

"I think the takeaway for investors next week will be that the economy continues to expand, albeit at a very slow pace and inflation remains very benign," Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York, told Reuters.

The data could show "that the concerns should be about deflation, not inflation," he said.

Both the Producer Price Index and the Consumer Price Index for May are expected from the US government this week.

The overall PPI for May, also due on Wednesday, is forecast to fall 0.5%, compared with a 0.1% dip in April. Core PPI, excluding volatile food and energy prices, is forecast to edge up 0.1% in May, compared with a gain of 0.2% in April.

Wednesday's data menu will include industrial production, which is forecast to rise 0.9% for May, compared with a gain of 0.8% in April.

The overall CPI for May, due on Thursday, is seen down 0.2%, compared with a 0.1% drop in April. Core CPI for May is forecast to rise just 0.1%, following no change in April.

Meanwhile BP Plc continues its efforts to contain the biggest oil spill in U.S. history. The US Coast Guard has given the company until early next week to increase its collection capacity.

BP's board is to meet on Monday to discuss whether to cut or defer its second-quarter dividend payment following the spill.

US Treasuries may continue gains. Government debt rose on Friday, pushing the 10-year note’s yield down the most in a week.

The yield on the 10-year note dropped nine basis points, or 0.09 percentage point, to 3.24% at 4.02pm in New York, according to BGCantor Market Data.

The euro fell against the U.S. dollar on Friday in its first daily decline since Monday, when it hit US$1.1876, its lowest level since 2006.

US oil prices also fell on Friday, losing more than 2% as an unexpected drop in May retail sales in the United States and easing industrial output in China revived concerns about the economy and oil demand.

For the week oil prices still managed a 3.2% gain thanks to a mid-week winning streak.

Gold gained for a third straight week, bolstered by lingering concerns over the economic recovery.

Dissipating worries about a European credit contagion and equity market rallies earlier last week have taken some steam out of the bullion market, traders said.

"I think gold is going to struggle, provided we don't get another bout of extreme risk aversion," RBS Global Banking & Markets analyst Daniel Major told Reuters.

Spot gold was at US$1,227.55 an ounce at 2.56pm EDT, against US$1,215.80 late in New York on Thursday. U.S. gold futures for August delivery settled up US$8 at US1,230.20.

Silver was at US$18.22 an ounce versus US$18.19, platinum at US$1,535 an ounce versus US$1,534, and palladium at US$444 against US$450.50.

Businesswire.co.nz

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