Monday 26 July 2010

Investors Will Focus on the Advanced Q2 GDP, while the Earnings Season Continues

The United States economy is facing another important week, where investors will be waiting for the first GDP estimate for the second quarter, while investors will be also focused on companies’ earnings, as so far most companies reported rather strong results for the second quarter of 2010.

The start though will be with data from the housing market, where recent figures from the housing market suggested that activity was deteriorating over the past few months as a result of elevated unemployment, tightened credit conditions, and rising foreclosures, however, the new home sales are expected to rise in June, though we might witness some deterioration in new home sales.

The S&P/CaseShiller house price index will be also released, where the Composite-20 index is expected to show that house prices increased by 3.73% compared to a year earlier, while compared to last month, house prices were probably unchanged.

The housing sector suffered deeply after the termination of the government’s tax credit program which indeed boosted activity in the housing market, and once the program had finished, demand for houses declined noticeably.

The consumer confidence index released by the Conference Board is expected to show deterioration in confidence levels among consumers, however, the final estimate for the University of Michigan confidence is expected to show that consumer confidence rather improved.

Also, the durable goods orders are expected to have risen in Jun on both the headline index and the excluding transportation index, though given the recent development in economic conditions, we would expect the index to fail estimates, as demand levels from both consumers and producers seem to have faltered recently.

Meanwhile, the Fed’s Beige Book is not expected to provide anything new to the outlook, where Bernanke signaled in his testimony last week before the Congress that the recovery seems to be losing pace amid the ongoing challenges that continue to weigh down on overall economic activity.

Also, the Chicago PMI Index is expected to confirm the recent weakness demonstrated throughout the nation’s manufacturing activities, where we witnessed the slump in the ISM manufacturing index, which indeed signaled that manufacturing activities is also experiencing some deterioration.

Finally, the Advanced estimate for the Gross Domestic Product will be released for the second quarter, where expectations signal that the economy continue to grow over a slower pace in the three months ending June, as the GDP is expected to show that the economy expanded by 2.5% only, compared with the prior reported growth in the first quarter of 2.7 percent.

The U.S. economy clearly lost some momentum during the second quarter of this year, where activities in the manufacturing, services, and the housing sectors all started to ease, especially in May and June, nevertheless, the economy will continue to recover according to Fed’s Chairman, Ben Bernanke, who attested that the economy will slowdown but will not undergo a “double dip recession.”

Also this upcoming week, more U.S. corporations will announce their financial results for the second quarter of 2010, where among those we have Exxon Mobil Corp, Chevron Corp, Merck & Co Inc, AON Corp, Amgen Inc, First Solar Inc, Moody’s Corp, and several more others, and accordingly we should expect more fluctuations in financial markets, especially stock markets, where we witnessed last week huge fluctuations in stock markets, after some companies failed to meet estimates, while many others impressed.

London Gold Market Report

Gold Breaks $1200 as Europe's "Secretive" Bank-Stress Tests Fail to Reassure Investors

rose to a 5-session high above $1200 an ounce early Friday, showing a week-on-week gain for US, Euro and Japanese investors but holding unchanged against Sterling and Swiss Francs.

Government bonds edged lower as silver bullion held flat and crude oil slipped back through Thursday's 11-week high of $79 per barrel.

Yesterday's 2% gain on Wall Street – plus a strong rise in Asian stocks – failed to spur more than a 0.3% rise in European equities, as investors and traders awaited the "stress test" results on 91 regional banks.

"The correlations for gold prices are all over the place at the moment," says Phil Smith at Reuters Technical in Beijing, "and it is actually high-positive with the US Dollar – which is not normal.

"Breakdowns in 'normal' correlations generally point to a switch in the attitude to risk, and gold seems to be undergoing a rethink by some investors after its huge rally over the past years."

Undertaken by what the Associated Press calls the "the little-known" Committee of European Banking Supervisors (CEBS) here in London, "the release of bank stress-test results is unlikely to be the silver bullet that guarantees a rapid normalization of the financial system," says UniCredit's chief economist, Marco Annunziata, "given the recalcitrant and rather secretive way in which it has been prepared."

Rumors in the European press saw Greece's Atebank drop 4% of its value this morning, while Madrid's El Pais said Spain's "caja" savings banks were likely to fail.

"The ratio of Tier I capital, reserves and preferred stocks that an institution must hold to survive the stress test's assumed risks comfortably is 6%," says the paper, "although the legal requirement is 4% minimum."

A survey by Goldman Sachs of 376 professional investors and analysts said today that 10 of the 91 European banks tested may "fail", and so need to raise fresh capital from shareholders.

On the economic front today, Germany's Ifo business sentiment index came in sharply ahead of expectations, as did the UK's latest GDP data, showing 1.1% growth between April and July – the fastest pace in four years.

Both the Pound and the Euro jumped in London trade, nearing Monday's 11-week highs against the Dollar and driving the gold price down to £775 and €925 per ounce respectively.

"There is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now," writes European Central Bank chief Jean-Claude Trichet in today's Financial Times, concluding the newspaper's week of 'Austerity vs. Stimulus' debate.

"The ECB will contribute to consolidate a confident economic environment by ensuring price stability...Sound public finances are [also] a decisive component of economic stability and sustainable global growth."

Across in Washington on Thursday, however, "In the short term I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy," said US Federal Reserve chairman Ben Bernanke to the House Financial Services Committee.

The current bull market in gold bullion and other precious metals "is the direct result of the evident profligacy of governments the world over," says John Browne, senior market strategist at asset-management group Euro Pacific Capital.

"Spendthrift politicians in Washington, London, and Tokyo, have caused people to lose faith in paper currencies."

"Spiraling deficits, ballooning government debts and risk of eventual monetization" are all supporting gold prices, agrees BMO Global Commodities strategist Bart Melek, quoted today at MineWeb.

"The expectation that the Fed, the ECB and other central banks will largely be on hold well into 2011 are additional factors that are likely to keep investors buying gold and willing to pay a premium for the insurance properties the metal offers."

"We believe that US interest rates will remain low for much longer," wrote Walter de Wet at commercial and bullion bank Standard Bank yesterday.

Citing the Taylor Rule – which suggests interest rates "by balancing the Fed's two major targets, inflation and unemployment" – the Fed will keep rates at zero until "at least 2012," reckons the Standard Bank team, and "low rates in the medium term are bullish for gold, despite our view that inflation will remain low.

"Confidence in the strength of emerging-market currencies [also] indicates that risk appetite for precious metals may remain firm."


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