Week Ahead: swapping risks

How much has really changed? Barack Obama has maintained his hold on power in the United States, but the ‘fiscal cliff’ – a combo of spending cuts and tax rises – is still the nastiest bogeyman stalking the world economy.

Fretting over the cliff has been enough to temper any market vim over the stability provided by a clear end to the US presidential race, hitting markets hard over the past few days. And it will continue to be the focus of the next week. Fearful investors might choose to dig in for a little longer yet.

Obama’s narrative of a nascent economic recovery will be interrupted by the first economic data reflecting some of the carnage caused by hurricane Sandy: retail sales and industrial production numbers for October – the storm hit New York on the 29^th – feature prominently among next week’s data load.

Minutes from the Fed’s Federal Open Market Committee’s latest meeting, to be published on Wednesday, will provide clues as to the future of monetary support which is propping up market sentiment around the world.

Chinese recovery and power change

In China, where data on Friday added to the feeling that the economy has troughed, the country’s leadership transfer continues into next week.

The result of the changes will provide clues as to the extent of China’s future reformist intentions – more important to the Asian region than the US election result, economists and fund managers say – while more data from China next week (exports) will provide more clues as to the extent of its short-term economic rebound.

From one risk to another in Europe

But while the US and China – and even the UK – show signs of economic improvement, Europe remains in a funk.

Thursday’s third-quarter GDP readings for eurozone countries are expected to confirm that the troubled bloc remains in recession. Germany might just manage growth, but Italy and Spain won’t be so lucky. With European Central Bank president Mario Draghi’s pledges to provide a backstop to these countries, we have ‘swapped systemic risk for growth challenges,’ as Ewen Cameron Watt of the BlackRock Investment Institute told journalists in London this week.

Those ‘systemic’ issues haven’t disappeared completely though. Eurozone finance ministers meeting on Monday may not be able to make a decision on releasing the next tranche of aid for Greece, even if the desperate nation passes its 2013 budget as expected on Sunday. German finance minister Wolfgang Schaeuble has poo-pooed any chances of releasing the frozen €31.5 billion until it is clear Greece is on track to bring its debts down to sustainable levels.

Step forward Mervyn King

In the UK, Mervyn King will be quizzed at a press conference on Wednesday over the Bank of England’s future plans to support the UK economy after the QE stimulus programme was halted this week.

As well as the brightening economic picture – as painted by the Office for National Statistics’ latest reading on the economy, not so vividly by more recent business surveys – the bank’s perceptions of the future path of inflation are key to any decision on its asset purchase scheme. Questions might also arise over Friday’s surprise announcement that QE income is being transferred to the Treasury. 

Clues will come from the quarterly inflation report, with Wednesday’s accompanying press grilling. The October inflation reading, due on Tuesday, is expected to show the consumer prices index being dragged back away from the 2% target, having dropped to 2.2% the previous month. Food prices, airfares, energy bill and tuition fee rises are all being cited as potential reasons for a step back higher.