World week ahead: All eyes on America as debt clock ticks

The start of the fourth-quarter earnings season will help determine whether the mood on Wall Street can remain as buoyant in coming days as it began 2013.

Last week's US budget deal and better-than-expected jobs data helped propel benchmark indexes, pushing the Standard & Poor's 500 Index to a five-year high.

In the past week, the Dow Jones Industrial Average rose 3.8 percent, the S&P 500 gained 4.6 percent to end the week at 1,466.47, the highest level since December 2007, while the Nasdaq Composite Index advanced 4.8 percent.

Alcoa unofficially kicks off the earnings season after the market closes on Tuesday.

Expectations are subdued. For the fourth quarter, S&P 500 earnings are forecast to have risen 2.8 percent while revenue is expected to have increased 1.9 percent, according to Reuters. That is markedly down from predictions in October for earnings growth of 9.9 percent.

Still, some analysts believe there is good potential for positive surprises.

"The thinking is you need top line growth for earnings to continue to expand, and we've seen the market defy that," Mike Jackson, founder of Denver-based investment firm T3 Equity Labs, told Reuters.

The latest clues on the world's largest economy will come in the form of data on the NFIB Small Business Optimism Index and consumer credit, both due on Tuesday, wholesale trade, out on Thursday.

There are also reports on international trade as well as import and export prices, and the Treasury monthly budget report, which are all due on Friday.

Recent data have largely been positive and minutes from the latest meeting of the Federal Reserve's policy-making committee, released Thursday, showed that its quantitative easing programme might ease or end before the end of the year.

In a Reuters poll on Friday, economists at nine of 16 primary dealers said they expect the current Fed program of buying $US45 billion per month of Treasuries to end in 2013.

Meanwhile, the clock is ticking on a resolution for the $US16.4 trillion American debt ceiling, reached on December 31. Temporary measures provide funding until about mid-February.

Before agreeing to lift the government's borrowing limit, Republicans first demand significant spending cuts from the Democrats.

In his weekly video address, broadcast on Saturday, President Barack Obama warned that it is time to act.

"If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic," he said.

The economy "can't afford more protracted showdowns or manufactured crises along the way".

The stakes are high indeed.

Also on Saturday, International Monetary Fund managing director Christine Lagarde warned that failure to find a solution to the US debt-ceiling debate and matters in Europe will result in a "major world economic crisis". 

She made the comments to reporters in the Malawian capital, Lilongwe, according to Bloomberg News.

Europe's Stoxx 600 Index added 3.3 percent last week.

Investors will watch policy meetings by the European Central Bank and the Bank of England this week.

The ECB will hold its benchmark main refinancing rate at 0.75 percent, while the BOE will keep the benchmark interest rate at 0.5 percent and the quantitative-easing target at £375 billion ($US603 billion), according to economists surveyed by Bloomberg.

Several eurozone countries are auctioning debt this week, including the Netherlands, Germany, Austria, Spain and Italy.

The UK and Switzerland are also selling debt.

Convincing investors to keep buying government debt through "credibility for the deficit reduction strategy" is "the key", and more important than the opinion of credit ratings agencies, British Prime Minister David Cameron told BBC television yesterday.

"The ratings you have are all hugely important, but in a way the real test is, what are the interest rates the rest of the world is demanding in order to own your debt," he said.

(BusinessDesk)