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World week ahead: Risk aversion remains high

Monday 13th September 2010

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Faster than expected industrial output and strong new lending in China as well as a surge in American wholesale inventories are bolstering optimism that the global economic recovery is intact.

After months of uncertainty, data increasingly is pointing to signs that while growth is slowing from its accelerated pace earlier in the year, it isn’t stalling. 

Banks in China extended 545.2 billion yuan (US$80 billion) of new local-currency loans last month, compared with 532.8 billion yuan in July, the People’s Bank of China said on its website on Saturday. That was the first acceleration in four months. 

The figures “are much higher than forecast and this may reflect strong borrowing demand, especially from the business sector,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia, told Bloomberg News. 

Industrial output in China rose 13.9% in August from a year earlier, retail sales surged 18.4% and consumer prices were 3.5% higher. The latest barrage of numbers from China were mostly in line or better than expected. 

The individual reports do offer hope that equities may be able to rally towards the end of the year. What’s undetermined though is whether investors need even more assurance to calm their nerves. 

The bears, who’ve been out in full force in recent months, aren’t giving any indication of plans to hibernate quite yet. As a result, volatility may be the catchword this week. 

“There is a lot of complacency in the market,” Brian Overby, senior options analyst at online brokerage TradeKing told Reuters. 

“So if we get one (item of) bad news that will cause a big jump." 

The Chicago Board of Exchange’s Volatility Index, the VIX, fell 4% on Friday to 21.99, lower than its 200-day moving average. Still, the measure known as Wall Street’s fear gauge was up 3.2% last week after having dropped 12% a week earlier. 

Part of the reason for the rapid up and down movement of the VIX has been thin trading volumes, reflecting end of summer holidays across North America. Most traders will be back at their desks this week and just in time for a series of reports on the state of the world’s biggest economy. 

The combined volume of stocks listed on the New York Stock Exchange, the American Stock Exchange and Nasdaq was 5.68 billion shares on Friday, almost half last year's daily average of 9.65 billion.

On Tuesday, there will be US industrial production and capacity utilisation. On Wednesday, the Producer Price Index, with jobless claims a day later. On Friday, the Consumer Price Index and University of Michigan/Thomson Reuters consumer confidence report will be released. 

“If all the data points in one direction, which is unlikely, you might see a more substantive shift in sentiment,” Michael Shea, managing partner at Direct Access Partners in New York, told Reuters.

“Getting a mixed message is the more likely outcome, perpetuating this current inertia we are experiencing." 

On Friday, the Dow Jones industrial average gained 47.53 points, or 0.46%, to 10,462.77. The Standard & Poor's 500 Index rose 5.37 points, or 0.49%, to 1,109.55. The Nasdaq Composite Index added 6.28 points, or 0.28%, to 2,242.48. 

For the week the Dow closed up 0.1%, the S&P 500 gained 0.5%, while the Nasdaq rose 0.4%. The technology heavy Nasdaq has risen for six of the last seven trading days. 

It was a better across the Pacific with the Stoxx Europe 600 Index rising 1.7% last week, extending its advance so far this year to 4.3% on optimism the euro-zone’s economic outlook was brightening and sovereign debt worries diminishing. 

European markets appear set to begin the week on a positive note as Deutsche Bank AG confirmed plans first reported by Bloomberg News of a multi-billion share offering. 

Deutsche Bank said it would seek to raise at least 9.8 billion euros and that it would make an offer to buy the rest of Deutsche Postbank AG that it didn’t already own. DB owns about 29.9% of Postbank. 

Part of the reason for the share sale is the pending agreement on new capital rules for banks, known as Basel 111. The objective is to ensure banks have enough capital in reserve to withstand global financial crises that may arise in the future, easing the need for governments to prop up financial institutions. 

On Friday, the benchmark 10-year US Treasury note was down 10/32 in price to yield 2.79%. 

US December gold futures eased US$4.40 to end at US$1,246.50 an ounce in New York. 

Copper for December delivery in New York fell 3.70 cents to end at US$3.4065 a pound.

“Current volatility allows for a buying opportunity,” David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group, wrote in a note to clients last week. 

And that’s notwithstanding the seemingly insatiable strength of China’s demand for raw materials and ability to produce.

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