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World week ahead: Economic hopes revived

Monday 6th September 2010

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Investors are likely to start this week more optimistic than they have been for some time as data shows the economic recovery is intact.

Friday’s payrolls report in the US has gone a long way to easing concerns that the world’s biggest economy was headed into a second recession - and that’s because of better than expected expansion in private employment.

Private payrolls climbed 67,000 in August - more than forecast. Overall, the economy shed 54,000 jobs in August as the government let go more temporary workers hired to complete the latest census. Analysts were forecasting overall losses of 100,000.

And in a sign that perhaps the pessimists were a bit too gloomy, the US Labor Department revised upward overall numbers for both June and July so that 123,000 fewer jobs were lost than previously reported.

"The recovery may be wobbly but it is still staggering forward," Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts, told Reuters.

That’s a theme that appears to be gaining traction not only when in reference to the US outlook but the global outlook too.

IMF First Managing Director John Lipsky said on Sunday that delegates to a Group of 20 meeting of deputy finance and central bank chiefs were becoming more optimistic.

"They are mainly confident that there is a moderate recovery underway globally," he told reporters in South Korea.

"Obviously there are risks and challenges, but things seem to be moving more or less in line with our forecast," Lipsky said, listing well-designed exit strategies and medium-term fiscal consolidation as challenges.

While equities investors have been hard pressed to take long bets the last few months and recent advances have come amid thin volume, Wall Street snapped a three-week losing streak ahead of the Labor Day weekend. US markets will be closed Monday for the traditional end of summer holiday.

Last week, the Standard & Poor’s 500 gained 3.8%, the Dow Jones Industrial Average rose 2.9% and the Nasdaq advanced 3.7%.

In Europe, stocks had their biggest weekly gain since July with the Stoxx 600 rising 3.7%.

“People have been too negative and we’re going to see higher prices on equity markets in the coming weeks,” Matthias Jasper, head of equities at WGZ Bank AG in Dusseldorf, Germany, told Bloomberg News.

In a sign that the week ahead holds promise, shares in Dubai rallied the most in more than two months.

The proportion of investors who anticipate a gain in the next six months jumped to 30.8% in the week ended September 1, the biggest rise since the period that ended July 15, according to a Bloomberg report.
That compares with the 17-month low of 20.7% the previous week and the historical average of 39%, according to the American Association of Individual Investors.

Bearish sentiment, or expectations that stock prices will fall over the next six months, fell 7.3 percentage points to 42.2%, the AAII said.

Investors will focus this week on US international trade deficit data, providing a gauge for spending, as well as the latest weekly jobless claims numbers.

US government data on Thursday is expected to show the international trade deficit narrowed slightly to US$47.2 billion in July, according to economists polled by Reuters, from US$49.9 billion in June, which was the highest since October 2008.

Initial jobless claims, also scheduled for Thursday, are expected to slip to a seasonally adjusted 470,000 for the week from 472,000 previously.

In the currency market, higher-yielding currencies may strengthen this week as investors’ optimism following last week’s clues on the economy means they’re willing to take on more risk.

The US dollar may rise against the yen, while the euro and other high-yielding currencies, should gain against the greenback. Australia’s reserve bank is expected to leave its key rate unchanged for a fourth month after the board meets tomorrow.

Policy makers in Asia and Europe left rates unchanged last week to support growth as the global recovery slows.

The main forex focus is on whether Japan will intervene to check the yen’s rise against the greenback.

A sharp drop in dollar/yen, such as 1 to 2% or more in a single day toward the 80 yen level and below, is seen as the most likely scenario that would prompt Japan to buy dollars even if it does so alone, according to a Reuters report.

The US government will sell US$33 billion in 3-year notes, US$21 billion in 10-year debt and US$13 billion in 30-year bonds next week, the Treasury announced September 2. The total of US$67 billion is the smallest combination of the maturities since July 2009.

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