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World Week Ahead US earnings, China data

Monday 9th July 2012

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June period, which would mark the first year-over-year decline since 2009, even as revenue increased 2.5 percent. Analysts still predict profit growth of 7.2 percent for the full year. As central banks in Europe and China last week indicated their increased level of concern about output by cutting interest rates, the world's largest economy showed another sign in a recent string of clues that its pace of expansion is slowing, too.

Friday's monthly US employment numbers fell short of economists' expectations, as only 80,000 jobs were created in June, while the unemployment rate held steady at 8.2 percent.

"We start out the US earnings season on a decidedly lousy note with the jobs report missing already low expectations, and anybody who was thinking we have set the bar low enough on earnings may run back and reassess their numbers," Mike Shea, a managing partner at New York-based brokerage firm Direct Access Partners, told Bloomberg News.

Wall Street's end-of-week decline wiped out gains for the week. In the past five days –though the trading week was shortened by the Independence Day holiday – the Dow Jones Industrial Average dropped 0.8 percent and the S&P 500 Index shed 0.6 percent. The Nasdaq Composite Index eked out a gain of less than 0.1 percent.

Among the American companies reporting results this week is JPMorgan Chase, due on July 13. Investors are keen to see the true extent of the bank's losses from derivatives trades that the bank initially estimated to be about US$2 billion, though added it could swell by at least US$1 billion. Reports since have speculated losses could quadruple. Some warn that equities are reflecting more optimism about the outlook than bonds.

The yield on 10-year US government bonds fell five basis points to 1.55 percent, according to Bloomberg Bond Trader prices – within striking distance of the record low 1.44 percent mark it set on June 1. "Bond markets are pricing in a much more dire situation than equities, which could leave equities a bit vulnerable in the short term," Colin Robertson, Global Head of Asset Allocation at Aon Hewitt, told Reuters.

Investors will eye the minutes from last month’s FOMC meeting, due to be released on Wednesday. Policy makers then announced plans to extend Operation Twist through the end of 2012, selling US$267 billion more shorter-dated securities and buying the same amount of longer-dated ones in an attempt to lower borrowing costs.

On the economic front, the weekly jobless claims data on Thursday, followed by reports on consumer sentiment and producer prices on Friday, will offer the latest clues on the sustainability of the pace of recovery in the US. Reports on China's GDP, industrial production and retail sales this week will help gauge the outlook for the world's No. 2 economy.

A Reuters poll showed economists forecast China's economy grew by 7.6 percent in the second quarter from a year earlier, which would be its worst performance since the 2008-09 financial crisis and the sixth consecutive quarter of slower growth.

Last Thursday, China's central bank unexpectedly cut borrowing costs for a second time in a month, while Europe's central bank cut its key rate to a record low of 0.75 percent. The ECB's move did little to help sentiment in the euro zone as investors had hoped for new measures to control the region's crisis that is slowly but surely eroding economic strength, including that of its powerhouse, Germany.

Yields on Spanish 10-year bonds briefly topped 7 percent on Friday – the level that forced Portugal, Greece and Ireland to seek international assistance to manage their debt load and avoid default. At the same time, investors are so keen to hold German bunds, as their risk of default is considered extremely low, that they were willing to accept yields below zero, i.e. their return will be less than their original investment.

On Friday, Germany’s two-year yield fell as low as minus 0.018 percent, the lowest since at least 1990, when Bloomberg began compiling the data. The bonds are rated AAA at Standard & Poor’s, compared with BBB+ for Spain. Europe's Stoxx 600 Index managed to rise 1.3 percent in the past five days.

On Monday, ECB president Mario Draghi is scheduled to address the European Union parliament in Brussels. EU finance ministers will meet in an effort to push ahead on a full agenda of fiscal measures. Also due this week is the Bank of Japan's latest assessment on the nation's economy, as well as the global one, at the end of its two-day meeting on Thursday.

"It has been our call since before June's meeting that the [Bank of Japan] board would ease in July and after weighing up the evidence, we are sticking to this call for an additional 10 trillion yen [US$125 billion] of asset purchases at this meeting," David Rea, Japan Economist for Capital Economics, told Reuters.

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