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Week in Focus

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Short−termism doesn't make for a recovery…

Mon, Nov 2 2009, 09:08 GMT
by RANsquawk Research Team

RANsquawk

False dawn…

The prayers of the “bears” have finally been answered and the seven month rally in the S&P 500 index is at last over. Investors are getting nervous that monetary and fiscal stimulus measures may be ended too soon. Fears are that the economy may again come to a standstill once the stimulus program devised by the Fed and Obama’s administration expire. Also, declines in consumer confidence and concerns on the health of financial institutions raised doubt about the durability of the economic recovery, prompting a sell off despite stronger than expected GDP. As such, Wall Street's "fear gauge," the VIX index surged and the USD index advanced on the back of risk aversion trades as investors dumped stocks.

Short-termism doesn’t make for a recovery…

The economic indicators have been less than impressive lately. However, there was a standout in the form of Q3 GDP from the US but that only provoked a one-day rally and nothing more. But after closer inspection, even the most bullish investors will find it difficult to remain optimistic. What the figure reveals is that not only the US economy resembling someone on steroids it also is becoming increasingly addicted to the government stimulus it is being fed. The subsidies and gimmick programs like “cash for clunkers” simply do not address the real fundamental problems in the economy and there are quite a few of them. There is a non-operational credit system, a job crisis that is far from over and not to mention massive quantity of vacant home and offices across the US. Nevertheless, the brains in Washington carry on working through the night devising new plans or simply turn to another option and debate expanding it, as is the case with the tax-credits for first time buyers.

Events this week

In the Euro zone and UK, the data this week will provide investors with further colour on the economies sectors with manufacturing and services PMI’s. Investors will look for confirmation of above 50 reading in the advanced EU PMI manufacturing but expect little reaction should the data come broadly inline with estimates since it is the final reading. In the US, the ISM manufacturing is likely to be the highlight of Monday’s session. The data is expected to edge higher to 53.0 from previous reading of 52.6. Several regional manufacturing forecasts have shown recent strength, which bolsters expectation for the ISM index.

But the true fireworks will come later in the week with traders paying close attention to the ISM non-manufacturing unemployment index and ADP employment change ahead of Friday’s Non-farm Payrolls data. Also, the Federal Reserve is again expected to leave headline rates unchanged this week; however there are mounting speculations that the Fed will begin to prep the market for eventual rate hikes. As such, the Fed's monthly policy statement could signal fewer liquidity measures for markets and adjust the statement to a more hawkish one. The infamous jobs report later in the week is expected to show that unemployment continued to rise in October to reach 9.9%. The market expectation is that unemployment will continue to rise over the upcoming few months to exceed 10%.

In the UK, the pressure is on the Bank of England to show it is proactive in fighting the recession following disappointing UK GDP data. The BoE will meet this week to talk rates and it is expected to be a heated debate by the MPC members whether to increase the size of QE program or turn to alternative measures instead. Expect the GBP to weaken further should the Bank vote to expand its Gilt purchase program.

On the corporate front, Pulte Homes, the largest US home builder is set to report earnings this week. The comments will be closely watched closely for signs the anaemic US housing recovery is close to a turnaround.
Elsewhere, Ford, the only US car manufacturer to avoid bankruptcy, could be an important indication of how auto sales might fare without government help in coming months.

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Published on  Mon, Nov 2 2009, 09:12 GMT