World week ahead: Who let the bears out?

Monday 5th July 2010

There’s a First Nations’ saying in Canada that appears to capture the mood on markets from bonds to equities to currencies to commodities: “When a pine needle falls in the forest, the eagle sees it, the deer hears it and the bear smells it.’’

Bears are out in full swing right now and there are few assets offering much cover. One money manager told Bloomberg News that we’re in a “psychological” bear market, a sentiment that is rising.

On Friday, Barton Biggs told Bloomberg Television that he dumped almost all of his technology shares because of increasing concern that the US economy would contract.

He wasn’t alone.

The Nasdaq 100 Index, which gets 63% of its value from computer-related companies such as Microsoft Corp and Apple Inc, has declined 9.7% after slumping 10 consecutive days, Bloomberg data shows. Microsoft has tumbled 26% since peaking on April 22, while Apple has fallen 9.9% in two weeks.

Voices of concern also are being raised in the wake of several weeks of disappointing economic data from China to Europe to the US, including last week’s manufacturing reports and the June payrolls report released in Washington on Friday.

As we’ve seen several times since the global financial crisis took effect, momentum turns on a dime and every data point, no matter its historical relevance, is interpreted as either the end of the world or the start of a new bull market.

The reality is - as expected - the US labour market is struggling to gain traction. The latest report showed that private companies hired just 83,000 last month, below the 112,000 forecast in a Reuters poll. The jobless rate dipped but because more people stopped looking.

President Barack Obama, who is positioning the Democrats for November congressional elections on hope for jobs growth, said the recovery wasn’t moving fast enough.

That’s exactly why investors weren’t impressed either with the data.

All three major US indices ended lower on Friday and for the week, the Dow fell 4.5%, the S&P lost 5% and the Nasdaq shed 5.9%.

The mood was equally bleak in Europe, where the Stoxx Europe 600 shed 4.5% for the week, its biggest drop in six.

Europe is making progress on addressing sovereign debt issues but it’s going to take time and more countries are going to put asking for some help, extending wariness about what lies ahead. Uncertainty feeds the bears more than bad news itself.

Ukraine is set to be the latest euro-zone nation to tap the International Monetary Fund for financial help, according to weekend reports - about US$14.9 billion worth of help.

The challenge for global policymakers is how to rein in spending to keep deficits from rising at unsustainable rates and yet not turn off the taps too fast and stall growth. Not an easy task at any time yet alone in the current environment.

China, which has powered the global recovery through its purchases of mostly raw commodities, can’t keep expanding at double-digit rates. Chinese authorities themselves are trying to ease back on the throttle.

In fact, Goldman Sachs Group lowered its 2010 forecast for growth in China’s real gross domestic product to 10.1% from 11.4%. Quarter-on-quarter real GDP growth will “slip to 8% or below” in the second half of 2010 before rebounding, the brokerage said in a note as reported by Bloomberg. Goldman kept its forecast for 2011 GDP growth unchanged at 10%.

Biggs, the 77-year-old money manager, is more pessimistic.

“I’m worried that we could have not just a soft patch, but a double dip which lasts two or three quarters and where nominal GDP is only up 2% or 3%, and that’ll have a big effect on profits,” he said.

“It’ll scare everybody and I’m afraid the market goes down another 10 or 15% if that happens.”

"There is growing concern over the possibility of a double-dip recession in developed markets," Rob Carnell, chief international economist at ING Commercial Banking, told Reuters.

"In consequence, people want to keep their money as liquid as possible in case things start to turn down."

This week the focus will be on what central bankers have to say in England and Europe, though no one is expecting any change in interest rates. There’s not much else on tap.

The inverse relationship between the US dollar and equities showed signs of breaking down last week, as both Wall Street and the greenback fell. For the past several weeks, the dollar has tended to rise when stocks fell on safe haven bids.

The 25-day correlation coefficient between the S&P 500 index and the US dollar index was positive 0.04 on Friday, Reuters data showed, showing almost no relationship. In mid-May, the correlation was a strong negative 0.91.

Some analysts said the breakdown suggests market players are perhaps pricing in a greater risk of a double-dip recession in the United States, which could erode the dollar's appeal.

The euro may rise above US$1.27 in the near term, with US$1.2770 seen as resistance, some analysts say. A break of that level may push the euro/dollar towards US$1.2950 and US$1.30, reflecting weakness in the US dollar rather a rethink of the euro’s outlook.

At the end of the day - and that which plays into the hands of bears - is the strength of the US economy, or perceptions of it. The week ahead is a shortened one for US markets, with the July 4th Independence Day celebrations putting Wall Street on the sidelines on Monday.

Headwinds are blowing from every direction it seems. Is it the start of a stormy summer Western Hemisphere? Bears, on the prowl, are hopeful.

Businesswire.co.nz

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