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Week Ahead: a health check for a ‘wobbling world’
The market exuberance that kicked in at the start of the year has given way to a more measured optimism among investors.
At the end of a down week for stock markets – one of the worst weeks so far in a year of big global gains – and heading into the second quarter of the year, economists and analysts the world over are again checking the pulse of a patient who has shaken off severe multiple trauma but remains on life support.
So much has improved, but plenty of big doubts remain. ‘Concerns about soft data in China, higher confidence in the US outlook, simmering wariness over Spain and elevated oil prices are all competing for airspace,’ said Gustavo Reis of Bank of America Merrill Lynch.
Not long ago the European Central Bank's market-boosting LTRO scheme, providing cheap loans for banks, would also have featured in such a list, but fears are growing that the 'LTRO elixir is lapsing', as David Page of Lloyds puts it.
This week investors were jilted out of their early spring gaiety by reminders that both the eurozone and China could yet spell doom, with continued economic weakness flagged by a dip in both euro area and Chinese purchasing managers’ indices. So activity remains stifled. Economists at ING interpreted the data as suggesting that the global economy ‘may be having another wobble’.
For China, the news comes on top of premier Wen Jiabao’s 7.5% economic growth prediction, probably the pronouncement that has most rattled markets so far this year. Atypical political wrangling in the world’s second-largest economy, ahead of a leadership transition, has added another layer of uncertainty for skittish investors. But still, even the most bearish of economists have gone quiet on that dreaded ‘hard landing’ scenario.
Fresh doubts in any corner of the world economy will inevitably re-ignite ‘what if?’ questions about the eurozone this year. Analysts at Investec note that deeply indebted Greece still faces ‘herculean’ challenges, and Spain’s struggle with its debt and high unemployment is a growing source of concern. The focus of European finance ministers beginning a two-day meeting on Friday, though, is expected to be on fine-tuning broader eurozone rescue measures. Perhaps it will take the forthcoming elections in Greece and France to provide a serious shift in sentiment towards the still-struggling region.
In the US, where sentiment remains cheery, economists continue to question whether the jobs market can remain resilient. But as elsewhere, there is the continued threat of rising oil prices, and hence higher gasoline prices for the all-important American consumer. In the coming week, manufacturing surveys and numbers on durable goods orders will be published for the US, providing further clues as to the state of the nation. In addition, Federal Reserve chairman Ben Bernanke will deliver a string of talks, providing economists with some semantic nuance to crunch in with the numbers.
In the UK, this week we’ll likely get confirmation that the economy shrank by 0.2% in the final quarter of 2011, with a weak retail sales report the greatest threat to an otherwise improving outlook for the first quarter of this year. A sentiment-sapping double-dip recession seems at least to be unlikely.
This lack of an overriding narrative to guide investors means 'attention has become diffused’, according to Reis. Yet he and his colleagues at Bank of America Merrill Lynch, he says, are cautiously optimistic – and that would seem to sum up the consensus among City mouthpieces.
The corporate week will get off to a quiet start, with no blue chips due to report on Monday.
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