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World Week Ahead Bernanke's address to Congress

Monday 16th July 2012

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All eyes will be on US Federal Reserve Chairman Ben Bernanke's semi-annual testimony to Congress on Tuesday and Wednesday as investors look for any clues about the potential and timing for further easing to lift the pace of growth.

As expectations for American corporate earnings have steadily been adjusted downward, investors will also focus on the companies releasing their quarterly earnings this week including Goldman Sachs, Bank of America, Intel, Microsoft and General Electric.

Last week's results such as from Advanced Micro Devices still provided disappointment to those already-reduced expectations, though it wasn't all bad news as JPMorgan & Chase forecast record earnings this year, even with a US$4.4 billion trading loss from its chief investment office in the second quarter. The 'London Whale' trading loss, which may top US$7 billion before year end, is proving to be nothing more than a blip on the bottom line of the biggest US bank.

Four out of the six S&P 500 companies that reported results last week surpassed analysts' earnings estimates while one missed, data compiled by Bloomberg show. Overall, profits probably decreased 2.1 percent in the second quarter, the first drop in almost three years, according to a Bloomberg survey of analysts.

"Expectations have been beaten down a lot," Robbert Van Batenburg, head of equity research at Louis Capital in New York, told Reuters. "The problem is we're dealing with a global slowdown, and I'm sure that's going to be reflected in some of the comments you're going to be hearing."

Other indications of resilience, or lack thereof, in the US economy will come in the form of the latest retail sales and inflation data, due on Monday and Tuesday respectively.

But first, the International Monetary Fund is expected to reduce its forecasts for global economic expansion in its World Economic Outlook, due on Monday.

On Friday, China provided further evidence of a slowdown in the world's second-largest economy, which grew at the slowest pace in three years in the second quarter.

In the past five days, the Dow Jones Industrial Average was down about 0.1 percent, while the Standard & Poor's 500 Index shed 0.2 percent, and the Nasdaq Composite Index suffered a drop of 1 percent.

The week's losses were limited because of Friday's gains. The Dow rose 1.6 percent, the S&P 500 advanced 1.7 percent, while the Nasdaq climbed 1.5 percent. The CBOE Volatility index, Wall Street's so-called fear gauge, fell 6.7 percent.

US Treasuries remain popular. On Friday, the yield on benchmark 10-year notes was 1.49 per cent, up from 1.48 per cent the previous day. That's close to the 1.44 per cent level touched in early June, which was the lowest going back to the early 1800s, based on data gathered by Reuters.

In Europe, the Stoxx 600 Index posted a 0.7 percent gain for the week as investors await further stimulus from the European Central Bank to prop up euro zone's flagging economy.

Futures traders added to bets the euro will decline against the greenback, according to Bloomberg, based on Commodity Futures Trading Commission data. The difference in the number of wagers by hedge funds and other large speculators on a drop in the euro compared with those on a gain -- so-called net shorts -- was 165,705 on July 10, compared with net shorts of 146,177 a week earlier. It hit a record of 214,418 on June 8.

On Thursday, Spain is scheduled to auction two-year, five-year and seven-year bonds, a day before euro zone area finance ministers gather to discuss the final details of the financial rescue package for the nation's banking industry. Last week, the government of Mariano Rajoy unveiled a 65-billion-euro austerity package.

There's still plenty of concern about other euro zone problem areas including Italy. On Friday, Moody's slashed the nation's sovereign debt rating to Baa2 because of concern over Italy's ability to carry out the reforms needed.

"The negative outlook reflects our view that risks to implementing these reforms remain substantial. Adding to them is the deteriorating macroeconomic environment, which increases austerity and reform fatigue among the population," the credit rating agency said.

The ongoing uncertainty is bolstering demand for certain euro zone bonds, particularly those of Germany, but also those of Austria, France, Belgium, Finland and the Netherlands.

"With no credible end in sight to the euro-zone debt crisis, bund yields continue to trend lower with the short-end trading in negative territory," Brian Barry, an analyst at Investec Bank in London, told Bloomberg. "Despite remaining largely risk averse, investors who need to pick up yield are increasing exposure to the semi-core sovereigns that have maintained their high ratings."

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