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World Week Ahead: Caution rises with new momentum

The US economy continues to produce signs the Federal Reserve's efforts to stoke the pace of recovery are paying off.

Margreet Dietz
Mon, 11 Mar 2013

The Dow Jones Industrial Average's record-setting streak has bolstered both momentum and caution as the US economy continues to produce signs the Federal Reserve's efforts to stoke the pace of recovery are paying off.

In the past week, the Dow gained 2.2 percent to finish at a record close of 14,397.07 on Friday, bringing its gain so far this year to nearly 10 percent. The Standard & Poor's 500 Index also climbed 2.2 percent last week, while the Nasdaq Composite Index added 2.4 percent.

The S&P 500 has advanced nearly 9 percent in 2013 to within 1 percent of its record. On Friday, the S&P 500 closed at 1551.18, compared with the record 1565.15 reached on October 9, 2007.

"I'd still be looking at equities," Frank Fantozzi, chief executive of Planned Financial Services, an independent wealth manager in Cleveland, told Reuters. "We still think the market is going to post positive gains for the year."

He recommends a "more defensive approach", given how strong the rally has been.

Friday's report showing that February gains in employment far exceeded expectations provided fuel to the optimists' fire. Employment jumped 236,000 last month, surpassing even the most optimistic estimate of analysts polled by Reuters, while the jobless rate unexpectedly fell to 7.7 percent, the lowest level in four years.

"This was a lot higher than anyone was expecting, and it definitely shines light on the fact that the economy is improving," Owen Fitzpatrick, head of US equities at Deutsche Bank Asset and Wealth Management in New York, told Reuters.

Even so, that progress is leading to questions about the central bank's stimulus programme.

“While we continue to make all-time highs, it [the market] continues to be live by the Fed, die by the Fed,” Ryan Larson, the Chicago-based head of US equity trading at RBC Global Asset Management (US), told Bloomberg News.

While the US dollar improved on the back of signs of sustained and accelerating improvement in the economy, treasuries lost some of their shine. Last week, the yield on the 10-year note yield climbed 20 basis points, the largest weekly rise in a year.

This week the Treasury is set to auction $US66 billion of notes and bonds.

Further clues

In the coming days, reports on retail sales, business inventories, import and export prices, the producer price index, the consumer price index and industrial production will provide further clues about the American economy.

US retail sales likely gained 0.5 percent in February, after a 0.1 percent increase in January, according to a Bloomberg survey. The Commerce Department report is due on Wednesday.

Europe's benchmark Stoxx 600 Index added 2.3 percent in the past five days.

Investors will eye a two-day summit by European Union leaders scheduled to start on March 14. The agenda includes banking regulation and a bailout for Cyprus.

Meanwhile, Italy is still trying to deal with the stalemate from its elections. On Friday, Fitch Ratings downgraded Italy's credit rating to BBB+ from A- and said the outlook was negative for the country suffering a recession that "is one of the deepest in Europe".

"The inconclusive results of the Italian parliamentary elections on February 24-25 make it unlikely a stable new government can be formed in the next few weeks," Fitch said in a statement.

"The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession."

China, meanwhile, also remains a cause for concern. Retail sales advanced 12.3 percent in the first two months of 2013 from a year earlier and industrial production increased 9.9 percent, according to the National Bureau of Statistics late last week.

Both fell short of economists’ expectations.


Margreet Dietz
Mon, 11 Mar 2013
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World Week Ahead: Caution rises with new momentum