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World week ahead: It is China or the US?

Monday 12th July 2010

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If not for China’s almost insatiable demand for raw materials these last few years, the world economy would surely be in the throes of a long-term recession.

And yet, while the US may have paved the path for the global financial crisis by over lending and regulatory failures, its recovery and more importantly, the ability of corporate America to generate profits is increasingly in focus and the barometer for investor bets on the future. 

In the week ahead, investors will be showered with a raft of data on the state of China’s economy, and after Wall Street closes on Monday, Alcoa will kick-start the second quarter earnings season. 

While most of the Chinese data will come later in the week, on the weekend the Asian powerhouse said its trade surplus reached its widest this year as exports rose to a record in June. 

The gap increased 140% to US$20.02 billion from a year earlier, the nation’s customs bureau said. That compares with the US$15.6 billion median estimate of 24 economists Bloomberg News surveyed. Exports surged 44% and import growth moderated for the third month, rising 34%. 

Big names like Google Inc, Intel Corp, JPMorgan Chase & Co and Bank of America Corp will post their quarterly scorecards in a busy week for Wall Street. Analysts are expecting earnings growth of 27% for the S&P 500 for the second quarter, after expanding at a rate of 58.3% in the January-March period. 

Alcoa is expected to post a profit for the first time in three quarters. 

JPMorgan will be in focus as many investors expect financials to lead or take part in a stocks comeback. But the bank is expected to post earnings of US67.9 cents per share according to Star Mine’s SmartEstimate, which weights estimates according to analysts' accuracy, versus the mean of US72 cents a share. 

While bearish sentiment has been strong of late, global equities posted solid gains last week as investors put aside increasingly inconsistent economic indicators. 

The Stoxx Europe 600 rallied 5.4%, its biggest advance in a year. The FTSEurofirst 300 index of top European share also rose 5.4% and the MSCI world equity index surged 5.1% last week. 

As for Wall Street, the Dow Jones Industrial Average posted a 5.3% weekly advance, the Standard & Poor’s 500 was up 5.4% and the Nasdaq Composite added 5%, helped on Friday by a relief rally for Google Inc after its license to operate in China was renewed. 

The jump in equities prices last week reflects a shift in sentiment among investors who aren’t convinced that a bear market has begun in earnest. Part of that reflects the start of bank stress tests in Europe, which some investors believe will restore a modicum of confidence that the sovereign debt crisis is being reasonably well addressed. Results of the tests are expected later in the month. 

The equity markets also reflect an easing of concerns about a little of this and a little of that. One positive was the IMF raising its forecast for global growth. 

The VIX, as the Chicago Board Options Exchange Volatility Index is known, dropped 17% to 24.98 last week. The index, which measures the cost of using options as insurance against declines in the S&P 500, is down from this year’s closing high of 45.79 on May 20. 

The US Treasury Department will sell US$35 billion in three-year debt on Monday, US$21 billion in 10-year notes on Tuesday and US$13 billion in 30-year bonds on Wednesday. 

On Thursday, the latest Chinese gross domestic product report is expected to show a slowdown to 10.5% year-on-year growth from 11.9%. 

On Friday, the euro hit a two-month high of US$1.2722, according to Reuters data, and was last at US$1.2646, down 0.4% as investors booked profits before the weekend. 

The euro has risen 0.7% against the dollar this week at current prices and gained 3.4% so far this month.

“In the past three weeks we've downgraded our view in order to take into account the deteriorating state of the global economy. But we're not in a camp to expect a disaster," Alain Bokobza, head of global asset allocation strategy at Societe Generale, told Reuters. 

"There's no risk of a double-dip. A double-dip is too risky and that's not what policymakers want." 

Investors don’t want that either.

Businesswire.co.nz



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