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RANsquawk Week in Focus: 17/01/11 - 21/01/11

 

They think it’s all over…it is now

The dramatic U-turn by the EU policy makers to open discussions on expanding the use of the European Financial Stability Facility (EFSF) managed to ease some of lingering concerns over the stability in the bloc last week. So much so that both the Spanish and the Portuguese debt agencies were able to auction their government papers will little trouble. However despite the apparent optimism, investors were reminded of the depressingly weak state of the economic recovery that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) are enduring amid a move by Fitch rating agency which cut Greece to junk status. As such it remains to be seen whether the belief in the EU government to come up with an assertive plan to stabilize the crumbling peripheral Eurozone will last. Especially since this week sees another round of government paper auction by the Portuguese and the Spanish debt agencies. Still, one can only hope that the economic boom that Germany is currently experiencing will last for the foreseeable future and in turn will offset the weakness that cannot be more evident in the periphery. The above mentioned type of reassurance is scheduled to take place this week in form of German IFO and the ZEW Surveys. In turn, depending on the outcome there is potential for the EUR currency to continue its last weeks’ advance or in fact make a swift reversal, which may even prompt some to question whether the last years’ mid-1.1800 lows need to be retested.


Earnings galore...

Apart from fretting over the stability in the Eurozone, investors will also be keeping an eye on the US based corporate sector which enters its second week of the latest earnings season. Given the pickup in  economic activity, which raised the question on the need to extend the QE v2.0 beyond the initially announced June 2011 date, investors will be paying particular note to comments during the press conferences regarding the economic outlook. Also, since profits continued to climb steadily in the recent quarters, investors will be hoping that companies will start rewarding their shareholders via various schemes such as share buybacks, dividend increases or even an issuance of special dividends.

Still, not to forget, there is also a slew of macro-economic data in the US to contend with this week in form of Philly Fed, Leading Indicators and another round of housing data which will again likely underpin the view that the road to recovery in the sector is very long and winding. Looking elsewhere, in the UK the attention will turn to the release of the latest CPI readings where the Y/Y figure is expected to edge higher to 3.4% from 3.3%. Much will likely be attributed to rising commodity prices and also towards the expected rise in the VAT rate to 20%. In spite of the persistently high inflation levels, the MPC of the BoE remain adamant that high level of spare capacity will bring down inflation towards the mandated levels. Nevertheless, the latest release is unlikely to please the head of the central bank Mervyn King, who has been criticized for his lack of action in containing the rise in inflation.

Finally, investors will also get to digest the release of the key Chinese figures such as GDP, CPI, Industrial Production and Retail Sales, all of which are expected to have a large impact on the appetite for the riskier assets.