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World Week Ahead: Balancing the books

Monday 10th October 2011

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As European leaders struggle to get ahead of the curve, continually being pushed to do so rather than seeming to take the initiative, Corporate America is set this week to begin reporting on how it fared in the three months ended last month.

Earnings season kicks off with Alcoa Inc on Tuesday to be followed later in the week by PepsiCo Inc, Google Inc, JPMorgan Chase & Co and Mattel Inc.

First though, the week begins with more drama in Europe. While a consensus is building that the region’s banks will need to be recapitalised, powerbrokers Germany and France appear far apart on how to proceed.

Someone is going to have to blink and there’s not yet an incentive for that to happen.

As a result, the debt crisis is likely to linger for some time and that is exactly what prompted Fitch Ratings to downgrade both Italy and Spain on Friday, and why Moody’s has joined Fitch and Standard & Poor’s in putting Belgium on notice.

“A credible and comprehensive solution to the (euro zone) crisis is politically and technically complex and will take time to put in place,” is how Fitch put it. “In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region.”

Is there any need for further explanation?

For financial markets, absolutely.

“Investors are understandably nervous,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc, told Bloomberg News. Sure, equities markets advanced last week, snapping back after sharp falls.

For the week, the Dow Jones Industrial Average rose 1.7%, the S&P 500 Index gained 2.1% and the Nasdaq added 2.7%. In Europe, the pan-European FTSEurofirst 300 Index closed up 2.6% on the week.

And the Chicago Board Options Exchange Volatility Index has eased back to about 36 points.

But optimism is proving hard to define and to retain, which is the crux of the issue for all markets.

While crude oil got a boost from Friday’s U.S. payrolls report, gold slumped. The euro pared early gains. There’s no momentum in any direction.

“We just can't seem to escape Europe's debt crisis,” Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas, told Reuters.

Brown Brothers Harriman strategist Mark McCormick said the prospect of a euro zone recession and interest rate cut were gaining traction. Until there is some concrete action, however, volatility appears set to drive markets on more wild swings.

There’s no reason for investors, business leaders or consumers to look too far down the road.

“We are like deer stuck in headlights thinking that there’s some magical solution,” PIMCO co-chief investment officer Mohamed El-Erian told Bloomberg. “There isn’t.”

It also seems increasingly clear that there’s more bad news on the horizon for global banks, with the Franco-Belgian Dexia coming into sharp focus last week.

Deutsche Bank has foreshadowed tough times and by Reuters estimates, European lenders are on the verge of another round of job cuts, in addition to the 70,000 workers who’ve been shown the door already this year.

Several major banks are planning to slice away another 10% of their staff in the coming months, recruiters and analysts say.

“This time, it's more structural. There will be less hiring for years to come,” said one senior British banker.

So any hope that the clouds are going away would be wishful thinking. Keep your umbrella close at hand: you’ll need it for any sudden shower as well as balancing yourself from the next gust of wind.

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