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Week Ahead: China and US hopes amid oil price threat
Our round-up of the main events to look out for in the financial markets and global economy in the week ahead.
Don’t worry too much about the higher oil price. Though decidedly bad for the global economy, the type of increase we’ve seen so far – hitting a peak of $128.4 a barrel, its highest level since July 2008 – is not enough to do any real damage.
The global economy has ‘wiggle room’, say Bank of America Merrill Lynch economists in one of many research notes published this week analysing the impact of rising oil prices which drew that same conclusion. Other economists, looking at the UK, say inflation shouldn’t veer far off its current downward course.
Nor should you worry about the broader potential impact on equity markets of the rise so far, which has been helped by improving economic sentiment and tensions between Iran and the West. Underlying economic conditions are what matter and these are improving, note strategists at HSBC, which will boost oil prices and shares.
Do worry if the Strait of Hormuz is blockaded and prices truly take off. ‘The increase in oil prices over the past year, 10% in euro terms, is nowhere near enough to flash warning signals for equities’, the HSBC team note. ‘However, tensions in the Straits of Hormuz have the potential to cause a spike in oil prices that would have severe consequences for equities. We recommend an overweight position in energy stocks.’
Rising oil prices are, as many economists have also noted, an unambiguous negative for the economy. But market sentiment and expectations of an economic recovery, with more stimulus from central banks, remains decidedly stronger. For now.
Super Tuesday and Chinese targets
So unless geopolitical developments push oil prices to some new unexpected peak, much more relevant next week will be answers on progress in the world’s two largest economies: the US and China (and still in that order).
The data highlight will be US jobs figures, the non-farm payrolls, a key global economic weatherglass. These are expected to show continued momentum.
Some US-watchers, though, say that the world’s largest economy is losing momentum. ‘Until the payrolls start to cool, the market is likely to remain in an optimistic mood. Our view on weakening momentum would imply that should happen sometime in Q2,’ noted Société Générale.
Before that we’ll get more clues as to who might be running the US after November’s presidential elections. Ten states are at stake in Republican primary elections on ‘Super Tuesday’ that could change the course of the elections.
China brings us a similar mix of the political and economic this week, albeit with its usual brand of opacity, with the annual meeting of China’s parliament, the National People’s Congress, starting on Monday where economic targets will be set. ‘In his last year at the podium, premier Wen is unlikely to signal any major policy shifts. The emphasis this year is on maintaining growth and stability,’ said Mark Williams of Capital Economics, who notes that a GDP growth target of 7.5% for 2012 will be set and then likely beaten.
Much of course depends on the path of inflation in China. Data published for February on Friday are expected to show a sharp fall after a temporary bounce back to 4.5% in January. If inflation keeps on coming down then the Chinese authorities have more room to continue with the economy-stimulating measures that global markets so crave.
Haircuts all round?
In Europe this week’s deadline for agreement on private sector involvement in Greece’s bailout could see any Greek bondholders who do not accept a ‘haircut’ – 90% need to agree – having one imposed on them; Greece’s government has warned that it will enforce losses if necessary through ‘collective action clauses’. It is unclear whether this would trigger $3.2 billion of credit default swaps, a form of insurance against non-payment, associated with Greek debt.
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