The Big Five: themes for the week ahead

June 29, 2009

Five things to think about this week:

–  Global stocks are on track for their best quarterly performance in the 20-year history of the MSCI world index in Q2. But it will take better economic data than in recent weeks and positive earnings surprises to give the rally new impetus as Q3 kicks off, especially since volatility and liquidity remain preoccupations.

– The Q2 reporting season looks set to highlight the gulf between financial institutions which are emerging in robust shape from the crisis and those still plagued by credit losses. Mark-to-market accounting changes and other factors may have distorted Q1 earnings but quarter-on-quarter comparisons could prove less flattering for those which have not been lucky enough to rack up high earnings, enjoy high margins and healthy trading revenues and pick up market share from defunct or weaker rivals. Recommendations in the next few days and weeks from a clutch of national and European authorities on the future landscape of regulation could throw some curveballs but will also offer a clearer picture of what banks will look like in the future. 

Jobless data is lagging but some key unemployment numbers next week, including from the United States, will offer clues on how deep the domestic demand downturn will be and how much of a shadow labour market woes will cast over consumer sentiment and household purchases — vital indicators for firms looking for signals as they take decisions on inventory rebuilding. 

– The ECB will be next after the Fed to perform the balancing act that central banks are engaged in as they try to manage markets’ inflation and rate outlook expectations. Breakevens on French inflation-linked bonds have eased from May peaks but those fretting about the QE exit strategy still want reassurance. Some central bankers are flagging the need to turn off the fiscal taps at the right time but the sharpness of these warnings will be tempered by a reluctance to trigger a sharp back up in yields while the market-imposed need for fiscal discipline is being blunted by these central banks’ bond buying. 

– Huge borrowing and debt issuance from major countries around the world ensure that long-term inflation is still a concern for some people in financial markets, despite soft economic data and huge capacity utilisation slack pointing to extremely subdued price pressures. Front-loading by some sovereign issuers still leaves plenty of supply to come onto market in H2. Question marks remain over how such supply will be absorbed, and whether shifts in household savings rates will help.

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