World Week Ahead: The big hurt gets bigger

World Week Ahead: The big hurt gets bigger

June 7 (Business Wire) – So much for bets on an improving U.S. labour market and optimism that the U.S. economy’s recovery would offset lingering worries about sovereign debts in the euro zone.

Friday’s disappointing May payrolls report for the U.S. triggered a big drop in equities and a big jump in the volatility index.

With signs that the budgetary blues have extended to Hungary, it looks like yet more belt tightening is on the agenda.

At least for now that appears set to keep investors on edge.

“The risk trade is under assault from every angle," Boris Schlossberg, director of currency research at GFT Forex, in New York, told Reuters on Friday.

It couldn’t have been any more clearly demonstrated than in Friday’s losses on Wall Street. The Dow Jones Industrial Average dropped 3.15%. The Standard & Poor's 500 Index fell 3.44%.

The Nasdaq Composite Index declined 3.64%. For the week, the Dow Jones industrial average fell 2%, while the S&P 500 declined 2.3% and the Nasdaq lost 1.7%.

Mohamed A El-Erian, whose firm runs the world’s biggest mutual fund, says stock investors should brace for higher volatility after the jobs report.

“Investors should keep their seat belts on and tight,” El-Erian, 51, the chief executive officer of Pacific Investment Management Co., wrote in an email to Bloomberg News.

“The disappointing jobs report is further evidence that drivers of self-sustaining private consumption growth are facing structural problems that result in slow income growth, reduced credit availability and lower ability to monetise wealth.”

The CBOE Volatility Index or VIX, Wall Street's top measure of investor fear, shot up 20.43% to 35.48.

Investors will be looking for some comfort from several key U.S. figures this week. Reports on retail sales and consumer sentiment, both of which should offer clues on the outlook for spending, are critical to easing rising anxiety that the recovery may be knocked off track.

Also on tap will be international trade data.

On the corporate front, BP Plc and the Obama administration remain under increasing pressure over cleaning up the biggest oil spill in U.S. history, especially if BP's containment cap turns out not to have worked.

Also, executives from Transocean Ltd, Halliburton and Anadarko Petroleum Corp appear at an energy conference in New York on Monday, where they will be pressed to explain how the disaster happened and how they plan to deal with the ramifications.

On Friday BP said its effort to divert oil leaking from its Gulf of Mexico well to a ship on the surface was working, with a goal of capturing more than 90% of the spill.

“I’m encouraged,” Kent Wells, a BP senior vice president, said in a subsequent press briefing. “I’m not going to declare success.”

Several days of experience and adjustment would be needed before the system can be called “somewhat successful” at curtailing the spill, he said.

Government scientists had estimated the well was leaking 12,000 to 19,000 barrels of oil a day, an amount they said might have increased by 20% after BP cut away kinked piping on Thursday in order to set the cap.

U.S. Securities and Exchange Commission Chairman Mary Schapiro, Obama administration adviser Paul Volcker and others speak at the International Organisation of Securities Commissions in Montreal.

Expect news on international reform coordination, capital market safeguards, and new rules for the biggest banks.

The biggest ever initial public offering is a step closer to taking place. Agricultural Bank of China Ld, the nation’s biggest lender by customers, will sell a 15% stake in what may be the world’s largest initial public offering on record.

The state-owned bank plans to sell 22.235 billion shares in Shanghai and 25.411 billion shares in Hong Kong, excluding an over-allotment option, according to a prospectus posted on the securities regulator’s website on Friday.

The lender may seek to raise as much as US$30 billion, according to reports.

“Agricultural Bank has to sell what’s so special about itself because the number of shares it’s offering to the market is huge and investors have many banks to choose from,” Deng Yongming, who helps oversee about $320 million at Changsheng Fund Management Co. in Beijing, told Bloomberg News.

On Friday the Stoxx Europe 600 Index sank 1.8%, cutting the week’s advance to a mere 0.2%.

On Friday national benchmark indexes declined in all 18 western European markets, except Iceland. The U.K.’s FTSE 100 declined 1.6%, Germany’s DAX fell 1.9% and France’s CAC 40 dropped 2.9%.

The euro is likely to fall again against the U.S. dollar this week as European sovereign debt issues remain a key focus. Traders on Friday took out options barriers at the US$1.20 level in the euro that had kept it supported for most of the week.

The euro fell as low as US$1.1972, according to electronic trading platform EBS, its lowest in more than four years. Market participants are now flagging the US$1.1800 area as a downside near-term target.

"The stress in Europe is now well beyond Greece and the periphery, including Hungary, which is on the hot seat today. Core spreads - Netherlands, France and Belgium, for example are all widening," Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York, told Reuters.

And the U.S. says it needs other countries and regions to step up their game.

“The necessary shift towards higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand, together with a more flexible exchange rate policy, in China,” U.S. Treasury Secretary Timothy Geithner wrote in a letter before a G-20 meeting of central bankers and finance ministers in the South Korean city of Busan that ended on Friday.

In a European Union finance ministers’ meeting today European Union monetary officials at the meeting are likely to endorse a deal on the emergency borrowing from the region's members in trouble, according to Reuters.

They will also assess the austerity programs of Portugal and Spain.

On Friday, the spokesman for the new Hungarian government, which was sworn in less than a week ago, supported the view that his country had only a slim chance of avoiding a Greek-style debt crisis.

There is also a trio of central bank decisions next week – the Reserve Bank of New Zealand, the European Central Bank and Bank of England.

The BoE is not expected to raise interest rates, currently at 0.5%, until 2011. But the focus will be on the ECB, with expectations high that the central bank may be compelled to resume longer-dated liquidity operations.

The ECB, analysts say, could also go a step further and adopt quantitative easing. Analysts say the most extreme scenario is a rate cut to 50 basis points to 0.5% despite the gradual rise in inflation, currently at 1.6% year-on-year compared to the 2% target.

It’s unlikely investors will be able to relax for some time yet.

(BusinessWire)

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