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World Week Ahead Traction hard to find

Monday 13th August 2012

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Global equities continue to edge higher on hopes that central bankers will bail everyone out, though there isn't a lot of conviction in that premise amid continuing signs that growth remains stalled -- at best.

Expectations that central banks in some of the world's largest economies will move to accelerate the rate of economic expansion has outweighed concern about the risk of disintegration of the euro zone and slowing growth of corporate profits.

That optimism helped the Standard & Poor's 500 Index advance for a fifth consecutive week. Still, some investors feel stuck between a rock and a hard place.

While there is still plenty of risk overhanging the markets from the ongoing euro-zone debt crisis and the increasing signs of slowing growth in China, there's also plenty of risk for those choosing to stay on the sidelines as stock markets keep moving higher.

"It's a dilemma that is uncomfortable to watch and to function in," David Joy, chief market strategist at Ameriprise Financial in Boston, told Reuters. "It's one of those markets where you're running a big risk being out."

In the past five days, the Dow Jones Industrial Average added 0.9 percent, the S&P 500 rose 1.1 percent and the Nasdaq Composite Index gained 1.8 percent.

Last week's reports including on jobless claims and home prices provided a picture of better-than-expected strength in the US economy. The coming days will offer a raft of fresh clues with reports on retail sales, business inventories, the consumer price index, industrial production and housing starts.

Commerce Department data, due on Tuesday, are expected to show that sales at American retailers advanced in July for the first time in four months.

In Europe the picture is gloomier, as is expected to be indicated by the latest data on the state of the euro zone economy, due on Aug. 14. Gross domestic product in the euro zone may have contracted 0.2 percent in the quarter through June, after declining 0.1 percent in the previous period, according to a Bloomberg survey.

There's now even talk of powerhouse Germany being pulled into a recession before the end of the calendar year.

In a comment written for the Mail on Sunday newspaper in the UK, Bank of England Governor Mervyn King said "the problems of the euro area continue with no obvious end in sight."

While equities continued to move higher, as Europe's Stoxx 600 Index posted a 1.6 percent gain for the week, renewed concern about measures to contain the region's sovereign debt crisis boosted yields on Spanish and Italian bonds last week.

"Worries have resurfaced in the past few days and seen the core market start to trade a bit better again," John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London, told Bloomberg. "Europe needs all the help it can get from the stronger global environment and if that fades away it's going to be even harder for these peripheral markets to dig themselves out of trouble."

The euro weakened against the greenback and the yen in the past five days. It dropped 0.8 percent to US$1.2289 last week, while shedding 1.1 percent to 96.17 yen.

Many are increasingly looking to the European Central Bank to intervene and for a deeper integration of the euro zone.

"It is only a question of time before the ECB buys sovereign bonds on a grand scale," Commerzbank chief economist Joerg Kraemer told clients on Friday, according to Reuters. "The emerging (euro zone) liability union is undermining the status of German bonds as a safe haven."

Meanwhile, former German Finance Minister Peer Steinbrueck, a possible challenger to Chancellor Angela Merkel in the nation's 2013 election, told the Sueddeutsche Zeitung he supported Social Democrats chairman Sigmar Gabriel's recent call for common debt issuance and closer fiscal integration.

"The party chairman is right about that and the development will go in this direction," Steinbrueck told the newspaper.

BusinessDesk.co.nz

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