World Week Ahead: Measuring the pace of the recovery

Monday 21st December 2009

Christmas may be just days away but investors remain focused on the pace of the recovery in the world’s biggest economy.

Last week the U.S. Federal Reserve’s key policy committee said economic activity was continuing to accelerate and there were signs that the deterioration in the labour market was abating.

This week’s data out of the U.S. will go a long way to providing greater clarity on the strength of the economy and the timing of a change in the Fed’s thinking about interest rates.

On Tuesday, the U.S. government will release its final estimate for third-quarter gross domestic product and existing home sales reports. On Wednesday, consumer sentiment and new homes sales reports will be released. And on Thursday, the latest durable goods and jobless claims numbers will be made available.

Trading on Wall Street on Friday was mixed with the Dow Industrial Average and the Standard & Poor’s 500 edging lower, while the Nasdaq Composite Index got a boost from better than expected results from Oracle and Research In Motion.

For the week, the Dow fell 1.3%, the S&P 500 slid 0.3%. The tech-heavy Nasdaq advanced 1%. The declines in the broader markets ended a two-week winning streak for the Dow and three-weeks of increases for the S&P 500.

Part of the reason for the mixed session was the quarterly expiration of options and futures for stocks and stock indexes on Friday. Another reason for the lacklustre sessions for the Dow and the S&P was a safe-haven rally in the U.S. dollar.

The U.S. dollar advanced in part because of lingering concerns about credit quality in Europe after Greece had its sovereign rating cut. Investors are worried about government balance sheets after

so much taxpayer money was spent to keep financial companies from failing during the peak of the credit crisis.

The European Central Bank issued its Financial Stability Review on Friday in which it raised its estimate for writedowns by euro-zone banks and warned about the risks of rising government debt to financial stability. It said the euro zone was at risk to renewed financial strains, in particular due to commercial property markets and to central and eastern European countries.

“All in all, the challenges facing the euro area banking sector in the period ahead call for caution in avoiding timing errors in disengaging from public support,” the bank said.

“Exiting before the underlying strength of key financial institutions is sufficiently well established runs the risk of leaving some of them vulnerable to adverse disturbances, possibly even triggering renewed financial system stresses.”

On Friday, the Dow Jones Stoxx dipped 0.4% to 246.19. National benchmark indexes fell in 16 of the 18 western European markets. The U.K.’s FTSE 100 lost 0.4%, Germany’s DAX retreated 0.2% and France’s CAC 40 dropped 1%.

The U.S. dollar had its best week against the euro in more than a month, leading traders to narrow their bets against the greenback.

On Friday, the dollar traded at US$1.4337 per euro at 4:05 p.m. in New York. The yen slid 0.5% to 129.59 per euro, from 129. Japan’s currency declined 0.5% to 90.38 per dollar. The euro dropped 0.6% on Friday to 1.4937 francs, reflecting a decision by Swiss policy makers opted not to intervene in the currency market. The dollar fell 0.4% to 1.0433 francs.

The Dollar Index, which measures the greenback against a basket of six major currencies, edged 0.4% higher to 77.77.

The U.S. dollar is also benefiting from revised expectations regarding the outlook for interest rates. The rate futures market on Friday priced in at least one quarter-point rate increase by the beginning of the second half next year. A few months ago, futures traders had factored in Fed tightening late in 2010.

In a sign of repositioning ahead of the Fed, Pacific Investment Management Co, or Pimco, has increased its cash holdings and decreased its government debt. Bloomberg News reported that Pimco’s cash position was 7% in November from negative 7% a month earlier - the negative position can reflect the use of derivatives, futures or shorting.

Businesswire.co.nz

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