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World Week Ahead: Eurotrash piling up

Monday 17th May 2010

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Investors worldwide are preparing for more volatility as concern about the European debt and currency crisis mounted within a week of euro-zone government leaders announcing a US$1 trillion rescue package to restore confidence. The euro currency is not under attack despite its steep fall, European Central Bank President Jean-Claude Trichet was quoted on Saturday as saying.

Trichet also told Germany's Der Spiegel magazine that any suggestion governments had forced the ECB to act in the current euro zone crisis, giving a fatal signal on its independence and credibility, was "nonsense". 

That’s not a sentiment reflected in the euro’s performance last week in particular. 

The euro fell 3.1% to US$1.2358 last week, from US$1.2755 on May 7. It traded as low as US$1.2354 on Friday, the weakest since October 2008. The common currency dropped 2.1% to 114.38 yen. 

And the damage isn’t over if speculators have any say in the matter. 

Speculators boosted bets against the euro to a record 113,890 contracts, up from 103,402 contracts, according to data from the Commodity Futures Trading Commission. 

To be short a currency is to bet it will decrease in value, while being long a currency is a bet its value will rise. 

In order to reverse the tide against the euro, officials said euro-zone governments have a lot of work to do. 

"There is a need for a quantum leap in the governance of the euro area," Trichet also said, adding that  financial markets were in their worst situation since World War One. 

ECB Executive Board member Juergen Stark said turbulence in the euro zone would calm down only if member countries reformed their economies and cut their deficits. "We have bought time, nothing more," he said in an interview with the Frankfurter Allgemeine Sonntagszeitung. 

EU Economic and Monetary Affairs Commissioner Olli Rehn said "It is important that markets read our package and see that we are serious about our defense of the euro area."

Of course, not everyone is focused solely on the euro. 

Next week eyes will be on results from US retailers, and special attention will be paid to forecasts for the rest of the year. Wal-Mart Stores Inc and Lowe's Co are among companies expected to report. 

Some US retailers, including Nordstrom Inc and J.C. Penney Co, reported worse-than-expected results on Friday. 

The US government on Friday said sales at US retailers climbed 0.4% last month after rising 2.1% in March. April's increase was double what markets had expected and marked the seventh straight monthly gain. 

The week ahead also brings US government data on inflation, and on the housing sector, which is still trying to shake off the country's worst economic downturn since the 1930s. 

On Friday, the three major US stock indexes closed between 1.5% to 2% lower on concern about Europe's debt crisis. Commodity prices also fell, with oil sliding to a three-month low below US$72 per barrel. 

For the week, the Dow Jones Industrial Average gained 2.3%, the Standard & Poor's 500 rose 2.2% and the Nasdaq Composite advanced 3.6%. 

The Dow Stoxx 600 ended last week 4.8% higher, the biggest gain since July 2009. It’s still 8.7% below this year’s high reached on April 15. 

On Friday, the Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ jumped 17% to 31.24. 

The Dollar Index, which measures the greenback against a basket of six major currencies, 0.77% on Friday. The US dollar traded at 92.47 yen. 

 US Treasuries rose on Friday as concern about the disintegration of the euro zone increased appeal of safe-haven assets. 

“There is a flight to quality emanating from the issues coming from Europe and the viability of their monetary union going forward,” Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York, told Bloomberg News. “The market has looked past the short-term liquidity solution of last weekend and is looking to the long-term structural issues.” 

The yield on the 10-year US Treasury note was at 3.45% on Friday, according to BGCantor Market Data, ending the week 3 basis points higher. The yield fell as much as 12 basis points on Friday. The yield on the two-year note fell to 0.79% on Friday, the lowest weekly close since February 5. 

On Friday, the Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 2.72%.

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