The Week Ahead

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By Greg Peel

Welcome to a new year of service from FNArena. I trust everyone has had an enjoyable Christmas, New Year and summer break, even if you are in Sydney in which summer has officially been cancelled this year.

In previous years there has been a fair bit of market movement while FNArena has taken its annual break but not so this year on a net basis, with the ASX 200 about 50 points higher than it was before Christmas. There have been some ups and downs in between but volatility, according to the VIX index, has drifted lower. Once upon a time we'd call numbers below 20 in the VIX the “complacency” zone but at present it's more like a “disinterest” zone. Affecting market sentiment into the new year has, aside from Iranian shenanigans, been our old friend Europe. If Europe was an animal you'd shoot it out of sheer humanity but unfortunately it seems we'll be stuck with it in 2012.

The headline to open this week was Friday night's downgrade of credit ratings for eight European countries, with France and Austria both losing their AAAs. Germany is the only eurozone country left with an AAA and “stable” outlook. If this were August last year, markets would be in freefall. But as it's five months later, markets have largely met the news with a yawn. Not only were the downgrades from S&P no surprise, it's hard to find any real meaning. I suggested last year when the US was downgraded that S&P should just downgrade everyone and get it over and done with, but rather the agency has elected to draw out the pain. The downgrades will impact on funding for the EFSF and the planned European Stability Mechanism but then, so what? No one believes there's enough money in them anyway.

This week sees the Troika (European Commission/ECB/IMF) meeting once more with Greece after pre-Christmas talks broke down with regard to the next tranche of bail-out funds. Greece may now have a technocrat leader in place but the appointment was never going to change the bottom line. Across Europe financial problems are all to do with bank lending, except in Greece. In Greece it's all about endemically corrupt and socially unworkable public sector, with private sector woes almost insignificant. The sooner Greece gets its eurozone marching orders the better, but this will depend on whether the eurozone itself is prepared to bite the bullet and “lose face” on such an outcome.

Merkel and Sarkozy will also meet with Italy's technocrat prime minister this week. Relatively successful recent bond sales suggest the threat of an Italian meltdown is diminished but it's not yet time to count any pollos. And on Friday the G20 finance ministers will meet for 2012's first round of “what the hell do we do now?”. All of the above will determine immediate movements in the euro, which has been the one financial instrument significantly changed (lower) since Christmas. As to why it's taken this long is anyone's guess.

We have also landed right near the beginning of the quarterly earnings season for US corporates. After previous quarters of significant earnings growth in the face of a stumbling US economy, the “confession session” leading into fourth quarter reporting has brought a substantial round of downgrades. Now we wait to see whether actual reports match such weakness. This week's reports include Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley and Google, along with Dow components American Express, Intel, IBM, Microsoft and General Electric.

It's a holiday on the US markets tonight for Martin Luther King Day, which will allow me a gentle easing back into Overnight Report mode from tomorrow morning. US economic data releases thereafter include the Empire State manufacturing index on Tuesday, the PPI, industrial production and housing market sentiment on Wednesday, the CPI, housing starts and the Philly Fed manufacturing index on Thursday, and existing home sales on Friday.

In Australia we see ANZ job ads today along with home loans and lending finance and the TD Securities monthly inflation gauge. Wednesday brings the Westpac consumer confidence survey and vehicle sales ahead of unemployment numbers on Thursday.

We have also leapt into the middle of quarterly production reports for the local resources sector. This week sees numbers from Fortescue ((FMG)), Rio Tinto ((RIO)), BHP Billiton ((BHP)) and OZ Minerals ((OZL)).

The focus may remain firmly on Europe but China will report its fourth quarter GDP tomorrow, along with monthly industrial production and retail sales data. Consensus is for 8.7% growth (year on year) compared to 9.1% for September.

Happy investing in 2012. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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