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World Week Ahead: Deciphering the data

Monday 17th September 2012

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Aggressive action by policy makers around the world has helped lift equities to multi-year highs, and these gains may be extended in coming days.

Wall Street climbed to the highest levels since 2007 after the US Federal Reserve on Thursday announced an open-ended stimulus program, a week after the European Central Bank did the same. Meanwhile a German court provided support for the euro zone's financial rescue fund, helping cement optimism for an end to the EU's debt crisis and the global economic slowdown.

"We've had a good period where everything that could go right did go right," Russ Koesterich, the global chief investment strategist for the IShares unit of BlackRock, told Bloomberg News. "The rally was a function of the fact that policy makers delivered, and probably even a bit more than expected."

In the past five days, the Dow Jones Industrial Average climbed 2.2 percent and the Standard & Poor's 500 Index rose 1.9 percent. So far this year, the S&P 500 has advanced 17 percent. Financial and technology shares, which comprise the biggest groups in the benchmark measure, surged at least 23 percent in 2012 to lead the gains among 10 groups, according to Bloomberg. The Nasdaq is at its highest since late 2000.

The surge in stock values however is leading to a divergence of opinion as to whether prices will push still higher or retrace some of their recent gains.

"We are starting to get into that heady territory where you need to be on the defensive," Richard Ross, global technical strategist at Aubach Grayson in New York, told Reuters. "Trying to squeak out the last 5 percent of a move when there is potentially a 15- to 20-percent downside in my opinion is pretty dangerous stuff."

Key to the outlook for corporate profits of course is the economic outlook as well as geopolitical risks which have flared in the last week with renewed anti-American, anti-Western protests across the Middle East, not to mention the escalating crisis in Syria and Israel's push for the US to be more decisive on containing Iran.

The latest clues on the US economy will arrive this week in the form of reports on the real estate market and manufacturing, and they are likely going to provide a mixed picture.

Housing starts rose to a 765,000 annual rate, the fastest in almost four years, from a 746,000 pace in July, while existing-home purchases climbed to a three-month high, according to Bloomberg surveys, while manufacturing probably shrank in two regions in September.

As for US Treasuries, the Fed's shift in focus to the jobs market has renewed concerns about inflation, making government bonds less attractive at least for the moment. Any pullback in equities though could shift holdings back into the fixed-income market.

A Reuters poll showed the Fed is expected to buy a total of US$600 billion of bonds under QE3, which it announced last week. The Fed pledged to buy mortgage debt at a pace of about US$40 billion a month until the US job market recovers.

In Europe last week, the Stoxx 600 Index added 1.3 percent with nervousness calmed by a German court ruling on the EU's rescue fund. Still, there's reason for investors to be wary. A two-day meeting of euro zone finance ministers in Cyprus that began on Friday showed that consensus remains hard to find, this time over the move to common bank supervision in the region.

In addition, there's no consensus yet in Athens on how to meet demands by its international lenders for more spending cuts. Nor has Spain, despite conflicting signals, decided to ask for outside financial help. The uncertain outlook for both Greece and Spain may hold the euro in a narrow range.Aggressive action by policy makers around the world has helped lift equities to multi-year highs, and these gains may be extended in coming days.

Wall Street climbed to the highest levels since 2007 after the US Federal Reserve on Thursday announced an open-ended stimulus program, a week after the European Central Bank did the same. Meanwhile a German court provided support for the euro zone's financial rescue fund, helping cement optimism for an end to the EU's debt crisis and the global economic slowdown.

"We've had a good period where everything that could go right did go right," Russ Koesterich, the global chief investment strategist for the IShares unit of BlackRock, told Bloomberg News. "The rally was a function of the fact that policy makers delivered, and probably even a bit more than expected."

In the past five days, the Dow Jones Industrial Average climbed 2.2 percent and the Standard & Poor's 500 Index rose 1.9 percent. So far this year, the S&P 500 has advanced 17 percent. Financial and technology shares, which comprise the biggest groups in the benchmark measure, surged at least 23 percent in 2012 to lead the gains among 10 groups, according to Bloomberg. The Nasdaq is at its highest since late 2000.

The surge in stock values however is leading to a divergence of opinion as to whether prices will push still higher or retrace some of their recent gains.

"We are starting to get into that heady territory where you need to be on the defensive," Richard Ross, global technical strategist at Aubach Grayson in New York, told Reuters. "Trying to squeak out the last 5 percent of a move when there is potentially a 15- to 20-percent downside in my opinion is pretty dangerous stuff."

Key to the outlook for corporate profits of course is the economic outlook as well as geopolitical risks which have flared in the last week with renewed anti-American, anti-Western protests across the Middle East, not to mention the escalating crisis in Syria and Israel's push for the US to be more decisive on containing Iran.

The latest clues on the US economy will arrive this week in the form of reports on the real estate market and manufacturing, and they are likely going to provide a mixed picture.

Housing starts rose to a 765,000 annual rate, the fastest in almost four years, from a 746,000 pace in July, while existing-home purchases climbed to a three-month high, according to Bloomberg surveys, while manufacturing probably shrank in two regions in September.

As for US Treasuries, the Fed's shift in focus to the jobs market has renewed concerns about inflation, making government bonds less attractive at least for the moment. Any pullback in equities though could shift holdings back into the fixed-income market.

A Reuters poll showed the Fed is expected to buy a total of US$600 billion of bonds under QE3, which it announced last week. The Fed pledged to buy mortgage debt at a pace of about US$40 billion a month until the US job market recovers.

In Europe last week, the Stoxx 600 Index added 1.3 percent with nervousness calmed by a German court ruling on the EU's rescue fund. Still, there's reason for investors to be wary. A two-day meeting of euro zone finance ministers in Cyprus that began on Friday showed that consensus remains hard to find, this time over the move to common bank supervision in the region.

In addition, there's no consensus yet in Athens on how to meet demands by its international lenders for more spending cuts. Nor has Spain, despite conflicting signals, decided to ask for outside financial help. The uncertain outlook for both Greece and Spain may hold the euro in a narrow range.

BusinessDesk.co.nz



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