World Week Ahead: Test of momentum

Monday 21st June 2010

Global equities appear to have found a new path forward, and may have received fresh impetus from China on the weekend.

On Sunday, China said it would allow a more flexible yuan, signalling an end to the currency’s two-year-old peg to the US dollar and removing one of the key differences of opinion between Washington and Beijing.

The decision was made after the world’s third-largest economy improved, the Chinese central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5% daily trading band unchanged.

“The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”

If that’s not enough to spur investors’ optimism, then it should at least help offset statements from the Group of 20 leaders, the U.S. Federal Reserve and the tough measures pending in an emergency UK budget.

Leaders from the world’s biggest 20 developed and developing economies will meet for two days to seek a consensus on how to put the global economy on a more sustainable footing.

The United States is at odds with Europe over the pace of austerity programs, and the potential swift end in Europe to stimulus efforts. Further differences have emerged over financial reform, including a lack of consensus on a global bank transaction tax.

A further cloud is concern that European debt problems, including those in Greece, Spain and Hungary, could affect the global economy has dampened investor sentiment for weeks.

Yet investors seemed to be focused on what lies further ahead.

US stocks rose on Friday, capping the market’s biggest two-week rally since November. The Dow Jones industrial average rose 0.16%. The Standard & Poor's 500 Index gained 0.13%. The Nasdaq Composite Index advanced 0.11%.

For the week, the S&P 500 rose 2.4%, adding to the previous week’s 2.5% advance. The Dow Jones Industrial Average advanced 2.4%. Both measures erased losses for the year.

The Federal Reserve is expected to leave rates unchanged near zero and leave in place its promise to hold them exceptionally low for an extended period after its regularly scheduled two-day meeting ends on Wednesday.

Investors are also watching to see if the Fed discusses the sovereign debt crisis in the euro zone and its impact on the U.S. economy - in particular, reaffirming its belief that the euro crisis isn’t something to lose too much sleep over.

"If the FOMC comments indicate that they're not too concerned about the fallout from Europe on the US, we will continue to see the market in an upward trend," John Praveen, chief investment strategist at Prudential in Newark, New Jersey, told Reuters.

On the economic front, the latest data on the state of the US housing market is set for release this week.

US existing home sales for May are due on Tuesday, while new home sales for the same month are expected on Wednesday. Existing home sales are expected to rise to 6.15 million units from 5.77 million the month before, and new home sales are expected to dip to 420,000 units from 504,000, according to a Reuters poll.

Weekly initial claims on Thursday are expected to ease to 464,000 from 472,000 the week before. Also Thursday, durable goods for May are expected to fall by 1.1%, compared to a gain of 2.8% in April.

Rounding out the week, the final reading of first-quarter GDP is expected to show a gain of 3%, in line with the previous reading.

Goldman Sachs is due to provide a response to the SEC's fraud charges on Monday, but there's a chance the bank could ask for more time. Goldman has pledged to defend itself vigorously against charges that it misled investors in the marketing of a mortgage-linked security that turned toxic during the mortgage crisis.

In other banking news, Barclays President Robert Diamond will take the stand in a New York trial on Monday over whether his bank received an improper US$11.2 billion windfall from its takeover of the US operations of Lehman Brothers.

On Friday the Stoxx Europe 600 Index rose 2.4% to 255.5, the highest closing level since May 13 and the longest streak of weekly gains since April.

Spain's parliament is expected to vote on government's labour market reforms this week. While Spain drew strong investor appetite when it sold 3.5 billion euros of bonds on Thursday, it remains a source of concern for some investors.

US Treasuries rose, pushing 10-year yields near the lowest since the week ended May 15, 2009, on speculation weak employment and subdued inflation will persuade the Federal Reserve to keep interest rates at a record low.

Ten-year notes pared their five-day gain yesterday as concern eased that Europe’s debt crisis would worsen. The Treasury will sell US$108 billion in shorter-term notes this week, US$5 billion less than last month.

The 10-year note yield fell 2 basis points, or 0.02 percentage point, to 3.22 percent, according to BGCantor Market Data.

The euro rose more than 2% against the U.S. dollar last week to as high as US$1.2416, pulling it further away from a four-year low of $1.1875 on June 7, according to Reuters data. It has shed 13% versus the greenback this year.

"The euro is very well bid right now," Douglas Borthwick, head of trading at Faros Trading , a full service FX execution firm for institutional investors in Stamford, Connecticut, told Reuters.

US crude oil prices rose on Friday by 39 cents to settle at US$77.18 a barrel.

Gold rallied to a record on Friday, as investors looked to precious metals for an alternative to equity or debt investments given renewed uncertainty about the economic recovery.

Spot gold hit an all-time high of US$1,261.90 an ounce, but was bid at US$1,256.65 an ounce at 3.20pm. EDT (1920 GMT), against US$1,243.40 late on Thursday. US gold futures for August delivery also climbed to a record at US$1,263.70, and settled up US$9.60 at US$1,258.30, its highest ever close.

"I think it is a case of gold's ability to compete with both credit and equity markets for investments. Competing with credit markets has been in play for a long time, because of low interest rates and low opportunity cost of holding gold," Tom Pawlicki, precious metals analyst at MF GLOBAL in Chicago, told Reuters.

Businesswire.co.nz

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