World week ahead: Economic concern rules

Monday 23rd August 2010

Investors are bracing for another week of key economic data that have left them unable to enjoy the overall better-than-expected earnings this season for fear that the current pace of profit growth is unsustainable in a deteriorating economic climate.

On Friday, two of the three major US markets dropped, making for a second straight weekly loss in equities as concern about the recovery outweighed corporate profit growth.

Stocks didn’t fare any better in Europe where the Stoxx Europe 600 Index dropped 1.3% last week.

The Standard & Poor’s 500 dropped 0.7% and the Dow Jones Industrial Average shed 0.9% in the five sessions ending Friday with the volume of trading unusually low. The Nasdaq eked out a 0.3% gain last week. The S&P 500 now has tumbled 12% from its high for the year in April.

"The market is moving into a defensive posture," Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont, told Reuters.

On Friday, the S&P managed to close above the 1,070 level, viewed as a key support level as it represents both the August 16 low and the 50% Fibonacci retracement from the rally between July 1 and August 9.

The most recent reports on US home construction and manufacturing fanned concern that the world’s biggest economy isn’t growing fast enough, lending credence to some market watchers forecasts of a double-dip recession.

Meanwhile, Japan’s economy expanded at an annualised 0.4% in the second quarter, far short of expectations. In Europe, German investor confidence dropped to a 16-month low in August, according to the Mannheim-based ZEW Center for European Economic Research.

Despite all the grim and mixed indicators, corporate profits are doing well. Three-quarters of the US companies have topped analysts’ average estimates. Earnings-per-share have grown 48% for the 461 companies in the index that released second-quarter results since July 12, data compiled by Bloomberg show.

Companies and analysts will need to rein in future expectations as the reality of the situation sinks in.

“The economy is really slowing down,” Wayne Wilbanks, chief investment officer of Wilbanks, Smith & Thomas Asset Management, told Bloomberg.

Even last week’s increase in takeover activity failed to ease frayed investors’ nerves.

On Thursday BHP Billiton formally launched its US$39 billion hostile offer for Canada’s Potash, the world’s largest fertiliser company, while Intel agreed to acquire software maker McAfee for US$7.7 billion.

Investors will focus this week on reports on US new home sales, home resales and durable goods orders for July, as well as the first of two revisions to the second-quarter economic growth rate.

The US government's estimate of GDP is expected to show a 1.4% increase in the second quarter, down from the 2.4% gain estimated a month ago.

In a sign of how tough the economy is proving to kick start, President Obama and his advisers are pointing more directly at the policies of George W Bush for the US fiscal mess.

In the currency market, the euro took another beating, dropping to the lowest in more than five weeks, after European Central Bank Governing Council member Axel Weber said the ECB should extend its loose monetary stance. His comments fuelled concern about further economic weakness in the euro zone, which already is plagued by gaps in growth among its members.

On Friday, yields on benchmark 10-year and 30-year US Treasuries initially fell to their lowest in nearly 18 months but rose later in the session as investors braced for US$109 billion of coupon-bearing debt coming this week when the Treasury holds its auctions.

Investors will have to wait until the end of the week to get Ben Bernanke’s take on everything economic. The chairman of the Federal Reserve is to give a speech on Friday. He may signal a further effort by the US central bank to bolster investor, and consumer, confidence.

Businesswire.co.nz

Comments from our readers

No comments yet