World week ahead: Where there's smoke

Monday 9th August 2010

It's not getting any easier to place bets on where equities or bonds or currencies for that matter are headed. And don't expect that to change this week.

The reality is that growth in the US economy is doing what all the indicators have been saying for months - it's slowing. Friday's jobs report confirmed what most investors already knew; the economy isn't creating jobs fast enough.

The downshift in growth has been embraced by bears as a sure sign that the US is on the verge of a double-dip recession. Most economists aren't so pessimistic.

"I think we are moving forward at a pretty gradual pace," former US treasury secretary Paul O'Neill said.

"But I don't think things are terrible."

In relative terms, US interest rates aren't going anywhere anytime soon. And soon is now looking even longer term.

In an interview with Bloomberg News, the manager of the world's biggest bond fund said he expected US interest rates to remain at current levels for two to three years.

"When you analyse that portion of the curve, it says the Fed is on hold for a long, long time," Bill Gross, said in a radio interview on "Bloomberg Surveillance".

"When you get down to 50 basis points on two-years, that's giving you a signal that there's not much left on the table."

Gross, based in Newport Beach, California, said the benchmark 10-year note's yield probably won't fall below 2% and that equity markets have priced against deflation.

"What the market really thinks is that for the next two to three years, the Fed doesn't do anything, but then magically nominal GDP and inflation reappear," he said.

Steady rates would provide a solid floor for corporate profits and should help equities.

The advance to decline measure of companies listed on the New York Stock Exchange climbed to a record 95,875 on August 4, according to data compiled by Bloomberg.

The indicator, which represents the cumulative number stocks that rise minus those that fall, was set at zero on August 20, 1996. It predicted rallies in July 2009 and February 2010, said Christopher Verrone, lead technical analyst at Strategas Research Partners.

"It's a significant development," Verrone told Bloomberg.

"Participation is broadening out. It's telling us that breadth and momentum are expanding into the rally. The move that we've seen off the July low looks a lot healthier than the ones we've seen over the last couple of months. It argues for the market to continue to climb higher."

Last week, the Dow rose 1.8%, the S&P 500 gained 1.8% and the Nasdaq advanced 1.5%.

Another bullish indicator for equities - at least those in the US - is the pending November federal elections.

Charts of the Standard & Poor's 500 index indicate that over the past several decades, in the second year of a presidential term, stocks begin to attract buyers in September and beyond, according to Concept Capital analysts in New York.

"July tends to be a good month, and August tends to be a volatile month and skewed to the downside. It's possible the market is tracing out the four-year presidential cycle where a better buying opportunity may present itself later on, perhaps in September," John Kolovos, a technical analyst at Concept Capital, told Reuters.

The index has been stuck in a trading range of about 1,070 to 1,130 recently.

Over the last 20 years, the average monthly return for August has been just 0.1%, their research note said. In mid-term election years, August has fared worse, down on average 0.75%.

This week investors will be watching for the Fed's latest take on the economy and the prospect that it will renew its purchase of some securities to counter the creeping pessimism about the outlook.

"Re-establishing quantitative easing wouldn't surprise us at all," Thomas di Galoma, head of fixed-income rates trading at Guggenheim Securities in New York, told Reuters.

Any Fed purchase plans comes as the US Treasury will sell more three, 10 and 30-year securities in a US$74 billion refunding.

In when-issued trade, the US$34 billion in three-year notes the Treasury will sell on Tuesday yielded just 0.808%.

Also on a when-issued basis, the US$24 billion in 10-year notes to be sold on Wednesday yielded 2.873% while the US$16 billion in 30-year Treasury bonds to be sold on Thursday yielded 4.037%.

In corporate earnings, major retailers including Macy's, JC Penney and Nordstrom are due to report. In addition there will be government reports on CPI and retail sales.

But don't expect to be much further ahead when the closing bell rings on Friday.

There are no clear signals of an upward or downward move and "right now we just got a short-term sideways trading range," Vinny Catalano, global investment strategist with Blue Marble Research in New York, told Reuters.

Businesswire.co.nz

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