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World Week Ahead: Clues on US, Chinese manufacturing

Monday 27th February 2012

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The focus will shift this week to the strength of the economies of the US and China, where the latest readings on manufacturing will perhaps provide a fresh reason to extend stock bets.

Investors are keen for more positive indications that the US economic recovery remains on track, that the Europeans are getting their sovereign debt crisis under control and that growth in China remains intact as officials try to engineer a soft landing.

But many investors remain on edge amid worry that the good news might turn out to be simply wishful thinking. Optimism can change on a dime.

"There's this fear of missing out that has prompted a lot of investors to buy, but the minute anything looks remotely negative they'll get out," Jeff Sica, president and chief investment officer of SICA Wealth Management, told Reuters.

So far US equities have gained. On Friday, the Standard & Poor's 500 Index closed at a level last seen before the 2008 financial crisis and it now has risen in seven of the past eight weeks. Yet the index has struggled to push confidently higher. And the Dow Jones Industrial Average, which topped 13,000 several times in intraday trading last week, also seems to be hesitating.

In the coming days, investors will get fresh clues on manufacturing from the world's two largest economies. In the US, data on January durable goods orders are due on Tuesday and the ISM factory activity barometer for February on Thursday.

China is due to release its official Purchasing Manager's index on Thursday. Last week's US economic indicators were the driving force behind Wall Street's advance with better-than-expected data on jobless claims, purchases of new homes and consumer sentiment.

That helped the S&P 500 on Friday close at its highest point since June 2008. The Dow closed just shy of 13,000 after topping it earlier in the day, down 0.01 percent on the day to 12,982.95. The Dow, the S&P 500 and Nasdaq Composite Index all ended the week with gains for those five days of between about 0.3 percent and 0.4 percent.

"We're grinding higher, but it doesn't seem like there's a whole lot of conviction on either side," Brian Lazorishak, portfolio manager at Chase Investment Counsel in Charlottesville, Virginia, told Reuters.

In the US, earnings have surpassed analysts’ estimates at 68 percent of the 441 companies in the S&P 500 that released results since January 9. The S&P 500 trades at 14 times reported earnings, compared with the average since 1954 of 16.4 times, according to data compiled by Bloomberg.

Even in Europe, where companies are presenting earnings that are far less rosy, the mood remains relatively upbeat.

Last week finally brought an agreement on Greece's second financial rescue package, allowing the country on Friday to begin a bond swap that aims to lop 100 billion euros off its staggering 350-billion euro debt.

Under the deal, banks, insurers and other investors holding about 206 billion euros of Greek government bonds will take a 53.5 percent loss in the face value of their securities, with actual losses estimated at 73 to 74 percent, according to Reuters.

Unfortunately, last week also brought a European Commission forecast that the euro-zone economy will contract 0.3 percent in 2012, instead of grow by 0.5 percent as it had expected in a November prediction.

Meanwhile, corporate earnings in the euro zone are clearly suffering from the impact of the sovereign debt crisis, a key reason why Europe's Stoxx 600 Index shed 0.4 percent in the past five days.

"European fourth-quarter earnings have been very mixed so far,” Ioan Smith, a director at Knight Capital Europe in London, told Bloomberg. “A very small percentage have beaten top- and bottom-line estimates whilst offering better guidance. Given the weak macro backdrop, it appears many have adopted conservative stances.”

This week brings the European Central Bank 's second long-term funding operation on Wednesday. European banks are expected to borrow up to half a trillion euros of cheap cash, according to Reuters. It may be the last one.

"Unless the euro crisis deteriorates significantly further, another large LTRO after this seems unlikely," Deutsche Bank's chief economist Thomas Mayer told Reuters.

Several euro-zone nations are set to sell bonds this week including Spain, Italy, Germany, France and Belgium. Ten-year bonds of Italy and Spain posted weekly gains, as Greece secured EU approval for its bailout. Italy’s 10-year bonds rose for a seventh week, the longest run of gains in the euro-era, while Spanish 10-year securities posted their biggest weekly advance in a month, according to Bloomberg.

Also on a steady climb, oil might continue its recent run. On Friday, crude oil for April delivery gained 1.8 percent to US$109.77 a barrel on the New York Mercantile Exchange, the highest settlement since May 3 amid rising tensions over Iran’s nuclear programme.

“Everyone is looking at US$110 oil,” Stephen Schork, president of the Schork Group in Villanova, Pennsylvania told Bloomberg. “The tension between Iran and the West has risen to an incredible level. We’re trading on fear that this will deteriorate into a new war in the Middle East.”

The prospect of an even higher price for oil could prove the biggest challenge for the global economy, in particular manufacturers in the world's two biggest economies, in the weeks and months ahead.


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