World Week Ahead: C-C-C-C-orrection pending

Monday 25th January 2010

Sharemarket investors are going to be tested this week and it could get nasty, some are saying.

Is it a bit premature to be calling for a 20% market correction as Reuters noted?

Perhaps but there’s no doubt that nervousness is back.

The Chicago Board Options Exchange Volatility Index, or VIX, which is derived from the price of options on the S&P 500 and is better known as Wall Street’s fear gauge, surged 55% in the final three days last week.

A number of currents converged last week to put investors on edge.

First, China moved to turn off the credit tap that has flooded its economy with cheap money. There’s even now talk of an interest rate rise. China’s inflation rate may be more than 5% by the end of the year, when there may be a “rush of interest rate increases,” Tao Dong, chief Asia- Pacific Economist at Credit Suisse AG, said at a conference in Shanghai, according to Bloomberg.

Second, US President Barack Obama declared war on America’s big banks, saying he was ready for a fight.

The bank plans were revealed two days after his party lost a key Senate seat, putting his healthcare reforms in peril. Obama said he would propose sweeping financial reforms intended to reduce risk taking, which he cited as a key contributor to the credit crisis. While it’s unclear what changes would pass Congress, the threat to future profits was interpreted as real enough.

And on Friday, investors were jolted by the possibility that Ben Bernanke might not be confirmed for a second term as chairman of the US Federal Reserve. Bernanke has been caught in a political net as both Democrats and Republicans look to dodge any responsibility for the credit crisis.

But that’s not all for investors to mull. On Friday, the UK raised its international terrorism threat level to “severe” from “substantial,” indicating authorities consider an attack “highly likely”.

The government added it wasn’t aware of an imminent danger. As the US fourth-quarter profit season evolves, there’s been far less to cheer.

Tech stocks which helped pace the rally through much of 2009 have lost a bit of steam. On Friday, Advanced Micro Devices (AMD) fell 12% on concern the PC processor maker would have a tough time maintaining sales momentum. Google dropped 5.7% after its sales growth forecast failed to meet some analysts’ forecasts.

This week more earnings will be reported including Apple and Microsoft.

On Wednesday, the iPod maker is expected to unveil a highly anticipated tablet computer, which some industry observers have been feverishly touting in recent weeks. J&J and Procter & Gamble also are set to report results next week.

Don’t touch that dial just yet
On Wednesday, the Fed’s policy committee will release a statement after a regularly scheduled two day meeting in Washington. There’s also Obama’s State of the Union speech later that day.

While the results season and the political partisanship of which US politics is infamous are adding to the maelstrom, Bernanke’s fate is likely to take centre stage. "The unthinkable has become a very real possibility - risks are rising that the Senate will unseat" Bernanke, Michael Feroli, an economist at JP Morgan told Bloomberg.

In-trade, an online betting platform, on Friday showed only a 68% chance that Bernanke will be confirmed, down from 95% just a few days back. It is unclear what would happen if Bernanke, who is also serving a separate, 14-year term on the Fed's board, is not confirmed by that deadline.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.17% to 78.28. Commodities ended mostly lower on Friday. U.S. crude fell US$1.54 to settle at US$74.54 a barrel, the lowest settle since December 22 and breaking below the 100-day moving average of US$75.20. ICE Brent crude fell US$1.75 to settle at US$72.83.

Gold for February delivery settled down US$13.50 at US$1,089.7 an ounce in New York.

Commodities, as measured by the S&P GSCI Light Energy Index, may gain as much as another 10% this year, led by oil, sugar and coffee, according to a Bloomberg report quoting Colin O’Shea, who’s the head of commodities at Hermes Fund Managers.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell on Friday 0.7% to 275.56.

Whether the expectation of a market correction will become a correction is yet to be seen. But momentum shifted dramatically at the end of last week and in and of itself, a correction has been pending for some time.

It’s a healthy part of any market. But with continuing signs that the US economy is healing, as are economies in Asia and Europe, corporate profits appear to be on a steadier foot. That should help limit potential losses.

Businesswire.co.nz

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