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World Week Ahead Central banks on radar

Monday 18th June 2012

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Eyes are on the world’s major central banks as investors have been reassured that the outcome of Sunday’s elections in Greece – which will become clearer within the next few hours – won’t be allowed to send financial markets into a tailspin.

In the US, the Federal Reserve’s policy statement on Wednesday at the end of its two-day meeting is expected to detail a fresh effort to pump up the pace of recovery.

First though, G20 leaders meet in Mexico on Monday with a focus on the impact of the European Union’s lingering fiscal crisis on global growth. Later in the week, euro zone finance ministers will gather ahead of Friday’s meeting of German, French, Italian and Spanish leaders in Rome.

Investors also are on alert for more news from the key credit rating agencies as a slew of sovereign debt downgrades and warnings swept across both sides of the Atlantic last week, with cuts for Spain and France as well as a warning for the US.

In the past five days, the Dow Jones industrial Average advanced 1.7 percent while the Standard & Poor's 500 Index rose 1.3 percent, as the latest US economic data indicating drops in retail sales, industrial production and consumer confidence spurred hopes the Fed will step in to prop up growth.

Europe's Stoxx 600 Index rose 0.9 percent in the past week.

Bond yields for troubled euro zone countries have been on the rise too as Spain asked for, and received, an EU commitment for up to 100 billion euros in financial assistance for its banking industry.

Spain’s 10-year yield jumped 67 basis points in the past five days to 6.89 percent. They did briefly touch 7 percent.

Even German bunds, perceived to be the safest and therefore most attractive in Europe, have lost some of their appeal. German 10-year bonds fell for a second week with the yield rising 11 basis points to 1.44 percent, according to Bloomberg News.

Like many big funds, French asset manager Carmignac Gestion holds no peripheral euro government debt anymore, and has even recently dumped all its holdings of bunds, according to Reuters.

"If we go deeper in the euro zone crisis, for a country which has a sizeable weight in the euro zone, a solution would have to imply more [contribution] from the Germans and an increased burden on their shoulders, which would be detrimental to the assessment of their credit quality," said Eric Le Coz, deputy managing director of Carmignac Gestion.

Late last week, European Central Bank President Mario Draghi said the central bank stood ready to lend financial assistance to any viable euro zone bank, while the Bank of England announced a 100-billion pound offer of loans beginning this week to banks.

The Greek vote might precipitate a break-up of the euro as some political parties in the country that has been awarded two international financial bailouts reject the austerity measures under the conditions of the latest rescue.

One likely outcome of the Greek election is the failure of any party to form a government, Gregory Peterson, director of investment research at Ballentine Partners in Waltham, Massachusetts, told Reuters.

"I think that's a fairly high probability outcome," he said. "It's going to leave a lot of heads scratching, and that's probably not going to be good for the market."

Early results indicate that the elections in fact are unlikely to hand a clear victory to any individual party.

After 15 percent of ballots were counted, the pro-bailout New Democracy party had taken a 31.1 percent share of the vote, while the radical leftist, anti-bailout SYRIZA party was running second with 25.4 percent of the vote, Reuters reported, citing the country's interior ministry.

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