World Week Ahead: Focus intensifies on euro-zone outlook

Monday 15th February 2010

Speculation is rife that the euro zone is about to implode and while the end result is likely to be less dramatic, investors will remain wary until some sort of concrete measures are detailed.

As a result, European stocks will find it hard to gain traction this week and the euro is expected to extend its decline into a sixth week. Europe’s woes, combined with China’s second tightening move ahead of the Chinese New Year, also have unsettled investors on Wall Street.

The focus at the start of this week is the unresolved issue of what to do to help Greece - and perhaps Portugal, Spain and others - out of fiscal trouble. Last week’s “political” encouragement from euro-zone leaders to each other about the need to be responsible fell on deaf ears. EU finance ministers are scheduled to meet on Monday and Tuesday to work out a plan to bolster Greece’s finances.

There’s little doubt that the failure of European officials to set out a clear strategy for Greece has left investors on edge. Greece’s budget deficit is at 12.7% of gross domestic product versus the EU’s ceiling of 3%. Greece has to its credit announced plans to rein in spending.

However the “confidence” that European Central Bank president Jean-Claude Trichet has in the Greek government’s moves isn’t shared by investors. And comments such as those from Joaquin Almunia, the EU’s monetary affairs commissioner, that there is no Plan B for Greece, aren’t of much help either.

"What the market wants to hear is that there is a viable remedy," Quincy Krosby, market strategist with Prudential Financial in Newark, New Jersey, told Reuters. The euro slid 0.3% last week, its fifth decline in as many weeks. So far this year, the euro has dropped 4.8% against the greenback and 7.9% versus Japan’s yen. And traders are betting the declines aren’t over yet.

As the Greek tragedy plays out, European policymakers also are being confronted with signs that the region’s economic performance is lagging, which may make it hard for the European Central Bank to increase interest rates anytime soon. On Friday, the EU reported that the region expanded at a lower than expected 0.1% in the final three months of 2009.

It had expanded by 0.4% in the third quarter. Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc, according to a Bloomberg News story on a report by Societe Generale SA strategist Albert Edwards.

The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” London-based Edwards wrote last week. “Any help given to Greece merely delays the inevitable break-up of the euro zone.”

With the US earnings season slowing and markets closed on Monday for the President’s Day holiday, there may be little inspiration for Wall Street.

Last week the Dow Jones Industrial Average and the Standard & Poor’s 500 Index each rose 0.9%, while the Nasdaq Composite Index gained 2%. Wal-Mart, Abercrombie & Fitch and JC Penney will be reporting results. The US government will release some manufacturing and housing data.

The Fed will release the minutes from its latest meeting, though investors have been inundated with comments from chairman Ben Bernanke and the regional presidents of the U.S. central bank in recent weeks and so no dramatic developments were expected.

Currency speculators increased bets the U.S. dollar has room to rise to the highest level since the week of September 23, 2008, according to Commodity Futures Trading Commission data released on Friday and Reuters calculation.

The value of the dollar's net long position rose to US$9.412 billion in the week ended February 9, up from US$5.84 billion in the prior week, Reuters reported.

Businesswire.co.nz

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