World Week Ahead: Relief and a reality check

By Timothy Moore

July 4 (BusinessDesk) - The global economy has made it half way through the calendar year and perhaps, just perhaps, a corner has been turned.

As this week progresses, investors will be able to assess fresh comment from both the European Central Bank and Bank of England. The ECB appears all but certain to increase its key interest rate, while the BoE is expected to hold steady as the U.K. economy struggles to gain its footing.

ECB President Jean-Claude Trichet made it clear last week that he remained wary of the impact of rising prices and he used his not-so coded phrase of being “in a state of strong vigilance”.

Trichet’s main worry is the price of oil. Yet Brent crude fell for a second month in June and had its biggest quarterly decline in a year in the three months ended June 30. Fed officials have continued to put commodity pressures in the ‘transitory’ basket too, with a bit of help from tapping strategic reserves.

The outlook cast by both the ECB and BoE policy makers in terms of inflation and economic growth will be closely watched.

Growth remains hard to define in many economies. The disparity in momentum has been a great source of confusion for investors and it’s unlikely that is going to change as the latest manufacturing data showed at the end of last week differing levels of activity in China, Europe and the U.S.

In the U.S., which is celebrating Independence Day on Monday, QE2 has come and gone, the debt fight continues and everyone will be watching the ADP jobs report on Wednesday and the monthly payrolls report on Friday.

“To be more confident about the economy in the second half, we need a renewed upward turn in the labour market,” James O’Sullivan, chief economist at MF Global Inc in New York, told Bloomberg. It can’t be much simpler than that. Without more new jobs, the U.S. economy will be standing still.

On a positive note for equity investors, the Chicago Board Options Exchange volatility index, or VIX, has fallen sharply with the Greek parliament’s passage of fresh austerity measures and the European Union’s pledge to transfer fresh funds to the debt-laden government. The VIX fell as much as 25% last week.

In addition, the Standard and Poor’s 500 index on Friday climbed further above resistance at its 50-day moving average at 1,317, establishing another floor in the market after the benchmark index moved above a number of technical resistance levels, Reuters reported.

“The mindset is an opportunistic ‘risk on’ trade and it is giving a lift to the market in spite of the fact that most people are scratching their heads. But that is what happens, particularly when there is very light volume, momentum dictates trend, and that is what we find ourselves in,” Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey, told Reuters.

For all of last week, the S&P 500 added 5.6%, the Dow Jones Industrial Average gained 5.4% and the Nasdaq led with a 6.2% surge. For all three indexes, it was their biggest weekly percentage gain since July 2009, Reuters said.

“We had real good gains toward the end of the quarter so it wouldn't surprise me to see a little bit of profit taking before we get those numbers (the latest U.S. jobs data) out during the course of the week,” Peter Cardillo, chief market economist at Avalon Partners in New York, told Reuters.

The week won’t be all central bank and jobs focused though. The debt debate continues to rage in the U.S. and if President Barack Obama’s press conference last week is an indication, there’s no reason for optimism at this point.

The White House believes a deal needs to be in place by July 22 to give Congress enough time to pass it, according to Democratic officials. That foreshadows another two solid weeks of bickering between Democrats and Republicans.

(BusinessDesk)