World Week Ahead: Building on US housing

Monday 19th March 2012

Riding high on recent gains investors will be looking to data on US housing, purchasing managers' surveys from China and Europe, as well as Japan's latest trade numbers to gauge whether the bull market is justified.

In the past week, investors took heart from the Federal Reserve's upbeat assessment of the state of the US economic recovery, as well as European Union approval of a second, and crucial, financial bailout for Greece, however fleeting that may turn out to be.

Confirmation that US inflation remains contained, even with the recent run-up in oil prices, also has helped. The consumer-price index rose 0.4 percent in February, after increasing 0.2 percent the previous month. The core measure, which excludes food and energy costs, advanced a smaller-than-expected 0.1 percent.

While the good news keeps coming and investors are allocating their money accordingly, pushing key indexes on Wall Street to highs not seen in four—or more—years, concern remains that the good times might not last.

"We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven't been this bullish for a long time," Randy Frederick, director of trading and derivatives at the Schwab Centre for Financial Research, based in Austin, Texas, told Reuters.

For the week, the Standard & Poor's 500 Index gained 2.4 percent, as did the Dow Jones Industrial Average. In Europe, the Stoxx 600 Index advanced 2.6 percent in the past five days.

The S&P 500 ended the week at 1,404.17, the highest level since May 2008. It has rallied 10 out of 11 weeks this year. The Dow Jones Industrial Average closed at 13,232.62. The S&P 500 has risen 28 percent from its 2011 low in October, according to Bloomberg. The gauge is up 12 percent in 2012, poised for its best first quarter since 1998. The index is still 10 percent below its October 2007 record of 1,565.15.

Lifted by the optimistic outlook for the economy, oil, whose rise also has been fuelled by tensions between the West and Iran, ended last week on a positive note.

On Friday, crude for April delivery advanced to US$107.06 a barrel on the New York Mercantile Exchange, the highest settlement since March 9 and the biggest gain since Feb. 21, according to Bloomberg. Even so, prices, up 8.3 percent this year, slipped 0.3 percent for the week.

The advance came even with renewed support for Saudi Arabia to increase output and from talk that the US and the UK may tap strategic oil reserves in a bid to steady prices as both nations head into their summer driving seasons. But quelling prices may not prove so straightforward.

“As the US economy grows, demand will increase, sending prices higher and tightening the market,” Paul Crovo, a Philadelphia-based oil analyst at PNC Capital Advisors, told Bloomberg. “The bias for the market remains to the upside.”

This week brings a slew of US housing data, including building permits, housing starts and mortgage application rates. Investors will pour over the numbers for signs that this part of the economy is picking up speed to bring its pace of recovery in line with the rate of improvement elsewhere.

The National Association of Home Builders/Wells Fargo index of builder confidence probably climbed in March to the highest level since May 2007, economists told Bloomberg before a report tomorrow. An advance would be the sixth straight, the best performance since 1995.

In Europe, the March flash purchasing manager's surveys for the euro zone—due on Thursday—are expected to confirm that the region, which remains in the throes of a sovereign debt crisis, is in a recession.

The HSBC Flash China Purchasing Managers' Index, an unofficial reading of manufacturing activity also due on Thursday, is expected to indicate an easing of growth in the world's second-largest economy too.

In the UK, all eyes are on the government's annual budget which comes as credit rating agencies have recently warned that the country is at risk of losing its top-notch AAA-rating. And the Bank of England will release minutes from its latest policy meeting.

Britain won’t ease austerity in its budget to be presented this week, UK Chancellor of the Exchequer George Osborne said in an interview aired Sunday on CNN’s “Fareed Zakaria GPS” program, Bloomberg reported.

“We are going to stick with the deficit reduction plan that I set out almost two years ago,” Osborne said, according to a transcript of the interview.

Japan reveals its latest export and import figures on Friday. Overall, there is still plenty of reason for caution, some say.

"If you've got big chunks of the world not firing on all cylinders, to expect ongoing material gains from risk assets seems a touch too hopeful to us in the short run," Adrian Cattley, pan-European equity strategist at Citigroup, told Reuters.

On the weekend, International Monetary Fund Managing Director Christine Lagarde warned that there is more work ahead. “Optimism should not give us a sense of comfort or lull us into a false sense of security,” Lagarde said on Sunday at a speech in Beijing at the China Development Forum. “We cannot go back to business as usual.”

(BusinessDesk)

BusinessDesk.co.nz

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