World Week Ahead: 'We are now beginning to see the collateral damage of the events in Europe'

World Week Ahead: 'We are now beginning to see the collateral damage of the events in Europe'

By Margreet Dietz

While Europe has agreed on new measures to combat its fiscal woes, investors have shifted their focus to the global economic impact of the euro zone's months of dithering.

Companies including DuPont and Texas Instruments issued warnings late last week that earnings won't meet expectations, fuelling speculation that the recovery in the world's largest economy is still under threat from the results of the sovereign debt troubles in Europe.

"We are now beginning to see the collateral damage of the events in Europe with the earnings guidance cuts," wrote Peter Boockvar, equity strategist at Miller Tabak & Co in New York, according to Reuters.

Earnings for Standard & Poor's 500 companies are now expected to grow 10.1 percent for the fourth quarter, down from a growth estimate of 15 percent at the start of October and from an estimate of 17.6 percent in July, according to Thomson Reuters data.

Last week ended on an upbeat note in terms of equity markets, with the major US indexes posting gains of 1.6 percent or more on Friday. That helped them rise for the week. For those five days, the Standard & Poor's 500 Index managed a 0.9 percent gain, the Dow Jones Industrial Average advanced 1.4 percent and the Nasdaq Composite Index edged 0.9 percent higher.

Among the recent data underpinning optimism for the US recovery was Friday's release of the Thomson Reuters/Michigan preliminary index of consumer sentiment which posted a better-than-expected gain as it climbed to a six-month high in December.

Investors though are still wary of what lies ahead.

“The market is lacking conviction,” Robert Pavlik, chief market strategist at Banyan Partners in New York, told Bloomberg News. “People are suspect about growth, or suspect about Europe. They’re worried that Europe could have a larger impact on the US.”

“It doesn’t look like Europe is collapsing, but where do we go from here - what’s going to drive growth in Europe?” Pavlik said. “Europe could be facing a period of slow economic growth. That’s keeping investors on the sideline.”

S&P said it’s examining the outcome of the EU summit before deciding whether to act on its warning last week to slash the credit ratings of 15 euro-region nations including Germany, according to Bloomberg.

Some market watchers aren't optimistic.

Goldman Sachs suggested that investors short German equities through the benchmark DAX index in a note to clients published late on Thursday

"The European summit seems focused on a set of future priorities for increased fiscal risk sharing and the outlining of some of the needed elements of a new fiscal arrangement, but looks to have little to say about alleviating proximate stresses in Greece and Italy and the European banking system more generally,” Goldman said.

Among the sobering news at the tail end of last week was a report showing that European banks need more than 100 billion euros in fresh capital to bolster their reserves.
On the weekend, President Barack Obama said "righting" the US economy would likely be a "long-term project".

Americans “have every reason to be impatient” with the pace of the recovery, Obama said in an interview with the CBS program “60 minutes,” according to an excerpt released by the network. “I didn’t underestimate how tough this was going to be,” Obama said. “I always believed that this was a long-term project.”

In the coming week, investors will eye the Federal Reserve's Open Market Committee meeting on December 13 for clues on its rates policy. No changes are expected.

Economic data on tap include US retail sales, released on Tuesday, and the consumer price index, due on Friday.

In the UK, investors are eyeing unemployment data and results from Thomas Cook travel agency.

The jobs data won't be rosy as the British economy is suffering from government budget cuts at home and the sluggish euro zone economy abroad. The impact of Prime Minister David Cameron's decision to opt out of the proposed new fiscal rules for the rest of the members of the EU remains unknown.

Elsewhere, economies are feeling the pinch too including the world's second largest. China’s export growth eased to the slowest pace since 2009, according to data released on Friday.

All the caution tends to benefit bullion. Gold might advance in the coming days, as 18 of 26 traders surveyed by Bloomberg expect the metal to rise this week, the highest proportion since November 11.

“People are buying out of concern, out of fear,” Mark O’Byrne, executive director of Dublin-based GoldCore, told Bloomberg.

Central banks “are all pursuing extremely loose monetary policies and we still have negative real interest rates. That makes gold attractive,” O'Byrne said.

Also on the radar this week are negotiations about a Greece debt swap. Greece and its private-sector bondholders will meet Monday in Athens, Reuters reported, citing a spokesperson for steering committee co-chair Jean Lemierre.

A second source told Reuters that the gathering of government officials, bankers and International Monetary Fund representatives will meet in the afternoon to try to work out how to restructure the 260 billion euros worth of Greek government debt in the private sector's hands.

Separately, there is growing concern about the IMF's exposure to the euro zone. The IMF cannot be expected to step in as a substitute for a stronger commitment by Europe which needs to assume the brunt of any losses on emergency loans, a senior US official told Reuters on Friday. Yet the EU clearly is betting on the IMF being a key component in containing the region's debt crisis.

(BusinessDesk)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

1 Comments

Comment Filter

Highlight new comments in the last hr(s).

ZH

Neither Harry Porter nor the Twilight series felt that one movie could bring proper closure, so both did the “final movie” in 2 parts. The EU has adopted that tradition and is already pushing the focus to the next Summit in March which really will be the grand finale. They also seem to have stolen from the Twilight series and only work in the middle of the night and have to hold press conferences before the sun comes up. They haven’t yet taken to calling us muggles, but they themselves certainly seem to believe in magic words like IMF while shorts live in fear of the “bazooka” with many names. With the Summit having reached a conclusion, we now wait on a few final scenes to play out. The plot started falling apart on Thursday with Draghi’s testimony, but by forming a circle, holding hands, and chanting IMF and G-20 over and over, the market was placated, at least for a day.

Your access to our unique content is free - always has been. But ad revenues are diving so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.