By Margreet Dietz
Italy and Greece are starting this week with something everyone had been waiting for: new leaders empowered to take concrete action towards containing their respective government debt.
On Friday, the Italian Senate approved a package of austerity measures, and the lower house followed on Saturday, leading to the resignation of Silvio Berlusconi. His successor is expected to be announced within hours. Meanwhile in Athens, Lucas Papademos has taken charge of a national unity government.
“We had one week of good progress, and now hopefully we’ll have technocrats in charge in Greece and Italy,” Greg Anderson, a senior currency strategist at Citigroup, told Bloomberg News. “Markets at this point will demand implementation. There’s a lot that needs to be done before the deep underlying fears are resolved.”
Key to that is the state of the world’s biggest economy. A favourable report on consumer confidence on Friday added to the recent slew of data pointing toward optimism about a sustained recovery in the US.
Markets responded accordingly and the global rally is expected to extend into the start of this week. Equities on both sides of the Atlantic advanced on Friday, with financial shares, recently pummeled because of their exposure to Europe’s debt crisis, taking a lead.
A 2.4 percent gain in the Stoxx Europe 600 Index on Friday helped it to a 0.5 percent gain for the week. The Standard & Poor’s 500 Index advanced 0.9 percent for the week, while the Dow Jones Industrial Average gained 1.4 percent.
A 1 percent gain in the euro on Friday limited its loss for the week to 0.3 percent.
“Between risky markets and defensive assets, one is being too optimistic and the other is being too pessimistic. The truth lies somewhere in between,” Eric Siegloff, global head of strategy and tactical asset allocation at ING Investment Management, told Reuters.
“What we're talking about [a euro break up] is a tail risk. When you look at a tail risk, the probability of that occurring is less than 5 percent,” Siegloff said. “You should have some protection for the 5 percent probability, but you also have to make sure your portfolio lives.”
Oil surged last week, benefiting from bets that the US will keep its economic recovery on track and that the Europeans will manage to get their fiscal troubles under control.
Even so, crude may decline this week, analysts and traders forecast in a Bloomberg News survey. Nineteen of 33 predicted a drop, 10 projected an increase, and four predicted little change.
Key US data on tap this week include October’s retail sales which are expected to rise 0.3 percent after a 1.1 percent gain in the previous month. There are also two reports on industrial output, consumer and producer prices and home construction.
Earnings reports by retailers including Wal-Mart will also provide an indication of their expectations for the holiday season. Retailers are preparing for Black Friday - the day after US Thanksgiving on Nov. 24 - which is the biggest sales day of the year.
There’s optimism for what lies ahead.
"My guess is we are going to have a reasonably good consumer in the year-end," Philip Dow, director of equity strategy at RBC Wealth Management in Minneapolis, told Reuters. "My target on the S&P is 1380. I still think it could happen."
The Bank of England will release a new economic forecast this week, with growth curbed by the EU’s fiscal crisis. In August, Britain’s central bank slashed its forecast for this year to 1.4 percent from 1.8 percent.
Other data released in the UK this week include consumer price index and unemployment numbers.
This week’s 3 billion euro auction of five-year Italian government bonds may provide clues on what investors think about Italy’s new emergency government, expected to be formed by former European Commissioner Mario Monti in time for the opening of the euro zone’s markets on Monday.
Investors demanded 6.087 percent yield in last week’s one-year debt sale of 5 billion euros by Italy, the highest in well over a decade.
"I would rather own Italian bonds than short equities,” Patrick Armstrong, fund manager at Distinction Asset Management, told Reuters. “Equities are pricing in recession, but not a depression. They are trading below book value, the euro zone as a whole, ex banks. They are cheap valuations compared with historical multiples."
As for the euro, all bets are off.
Goldman Sachs Group recommends buying the euro after developments in Europe’s sovereign-debt crisis last week, while Morgan Stanley said it’s time to sell the 17-nation currency against the US dollar, according to Bloomberg.
(BusinessDesk)
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