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World Week Ahead: Recovery shifts into a new gear

Monday 8th March 2010

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Hang on, the bulls are preparing to stampede. Friday was a day for all things positive. First, the US government reported that fewer jobs than expected were lost during February, yet another sign that the world’s biggest economy is set to power ahead. 

Second, German Chancellor Angela Merkel said her Greek counterpart did not ask for any financial help at a meeting between the two leaders and it appeared that perhaps Greece - and the euro-zone itself - had dodged the deficit bullet. 

And finally, the iPad will be available next month. â€¨While the iPad isn’t going to revolutionise anything, it’s the optimism that Apple enthusiasts and investors bring to the table that matters most.

Shares in the California company surged to a record high close on Friday, bringing its market value to US$198.5 billion. 

The Dow and the S&P 500 closed at their highest levels in six weeks, according to Reuters data.

The S&P 500 is now off only 1% from a 15-month closing high set on January 19, having clawed back from a drop of more than 8% through February 8. All three indexes are now positive for the year. For the week the Dow rose 2.3%, the Nasdaq added 3.9% and the S&P 500 climbed 3.1%. In Europe, sentiment also has been on an upswing.

The Dow Jones Stoxx 600 rallied 4.6% last week and was now in positive territory for the year.  On Friday, Greece led the gains with its ASE Index rising 8.8%. Other markets weren’t far behind: France’s CAC was up 5.4%, Germany’s DAX gained 5% and London’s FTSE 100 advanced 4.6%. 

In another sign that investors are in a good frame of mind, the Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, fell to its lowest since May 2008. It slid 6.9% to 17.42 on Friday. 

What matters most to investors is the state of the US economy, given conflicting signals on the pace of its recovery. 

The February jobs report showed that American manufacturers hired workers for a second month in a row, the first time they have done so since 2006. Even skeptics will find it hard to suggest that the outlook hasn’t fundamentally improved. 

Later Friday, the US Treasury released statistics that showed US consumers have begun borrowing again, interpreted as confirmation that confidence is rebuilding. Consumer credit rose at an annual rate of 2.4% in January. So where are investors putting their money?

According to fund tracker EPFR, investors pulled another US$30 billion out of money market funds in the week ending March 3, bringing the year-to-date outflows to more than US$160 billion. 

A significant chunk has gone to global bond funds, which posted their biggest weekly inflow in over a decade, Reuters reported, while global equity funds took in the most money since October 2007 in the same week. 

Equity funds attracted a net US$2.3 billion in the same week, reducing their outflows since January to US$11.6 billion. 

Within the equity sector, European equity funds surrendered another US$657 million, posting outflows for the sixth time in the past seven weeks. U.S. equity funds posted inflows for a third consecutive week, for the first since December. 

In the coming week, there will be more data on the US economy in the form of wholesale trade, international trade, retail sales and consumer sentiment. 

The Treasury Department will sell US$74 billion in notes and bonds next week: US$40 billion in 3-year notes on March 9, US$21 billion in 10-year debt the next day and US$13 billion in 30-year bonds on March 11.

For currency investors, the US dollar and the commodity dollars still look attractive and could advance next week. And while the euro’s outlook improved on Friday, skeptics remain about whether Greece really has managed to avert waving the white flag. 

Bloomberg reported on Friday that European Union nations were still working on a contingency rescue plan for Greece, should it be required. The US dollar last week rose 1.5% against the yen.

Last week, Japan’s currency fell against all 16 of the most traded currencies tracked by Bloomberg amid signs that the global recovery was still on track.  

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