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World Week Ahead: The price is right

Monday 29th November 2010 1 Comment

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American consumers are shopping up a storm as they finally feel enough confidence to spend money in an economy that seems to be on the road to a real recovery.

Across the Atlantic, Europeans are waiting with baited breath to see whether Ireland’s financial bailout will be followed by similar packages for Portugal and Spain - and whether the euro zone has the political will to remain intact.

Those are the two main themes set to dominate financial markets in the final month of 2010. As for this week, the latest slew of housing and jobs data could help clarify how happy the holidays will be for the world's biggest economy. "We're still in the early stages of the labor-market recovery" in the US, Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said.

And that means that investors are still a bit wary.

In a shortened week, the US benchmark stock indexes fell. The Dow Jones industrial average shed 1% and the Standard & Poor's 500 index declined 0.9%.

Last week the Stoxx Europe 600 Index shed 1.1%, its biggest weekly drop since September.

The initial read on Black Friday retail sales was positive, though it appears that a lot of those who stood in line for the door crasher promotions might need still higher discounts.

Sales rose just 0.3% to US$10.7 billion, ShopperTrak, the Chicago-based consulting firm, said on Saturday.

Still, there were other signs of consumer strength. Shoppers took advantage of earlier-than-usual promotions in the first two weeks of November, pushing up sales 6.1% and 6.2% respectively, according to ShopperTrak.

Retailers in recent weeks have begun to offer deeper discounts earlier than usual in a bid to pry open consumers' wallets. Consumers, while more eager to spend this year than last, have been conditioned to wait closer to Christmas for the biggest bargains and that appears to be the case this season too.

"The consumer is more confident and they are spending a bit more money, and I think retail as a whole is perking up," Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, said, adding that retail stocks "look relatively cheap to us, and I think sales are going to surprise to the upside."

The other key theme for investors is the continued debt woes in Europe.

The European Union has all but approved an 85 billion euro (US$115 billion) rescue for Ireland after a week of negotiations.

"The assistance to Ireland is nearly done," French Economy Minister Christine Lagarde told reporters. "We just have a little fine-tuning to be done, notably on interest rates."

A German government source said the ministers were also discussing Portugal and its possible need of an EU bailout.

On Friday, Portugal's lawmakers passed a tough austerity budget and European Commission President Jose Manuel Barroso denied that a financial rescue plan was in the works for Portugal.

That did little to deter the bond vigilantes who pushed Ireland into the hands of the IMF and appear set to do the same to Portugal and Spain.

Spanish officials continue to say they do need help to manage their finances. Clearly, markets aren't so convinced.

On Friday, the euro dropped to US$1.32, bringing the week's fall to 3.5%.

"The bigger question is will Spain and Portugal remain immune and I would look and say, 'no'," Greg Salvaggio, vice president of trading at Tempus Consulting in Washington, said.

"The situation in the euro zone will continue to deteriorate," he said, adding the euro could drop "below US$1.30 and perhaps as low as US$1.25 by year-end."

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Comments from our readers

On 29 November 2010 at 11:20 am Maurizio Piglia said:
As far as I am pleased that you reported the ShopperTrack numbers correctly,others dropped the detail, as the numbers, in real term, show a contraction on 2009; I am, nevertheless not at all impressed by the positive spin that permeates the comments on the article. I will quote you what Bill Martin , ShopperTrack founder, said:"The smaller than expected increase is due in part to discounts offered earlier in November as well as online-only promotions,traffic to stores was up over 6% for the first two weeks of November, an early boost that could affect retailers' performance in the coming weeks, he said." "The reality is we have a deal-driven consumer in 2010," Mr. Martin said in a release. "The American shopper has adapted to the economic climate over the last couple of years and is possibly spending more wisely as the holiday season begins." We all know that the tactics envisaged above will probably ( and not always..)lift volume statistics, but will depress the margins of an already "on life-support" retail sector. And take into account that is not a done deal, that the Irish will allow their Govt. to do any deal that condemns their people to over a decade of poverty for safekeeping senior bondholders that are mainly German, UK, and French failed banks. I am ready to bet that before the year end this deal will have been totally renegotiated, Ireland will restructure and that will entail a serious haircut that will show the European banking system is pretty much buggered and a wave of nationalizations will follow...Hardly in the line of the positive spin that mainstream media are pushing. I expected a more independent and in depth view by an independent editorial group.
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