The big picture

• Do you ever get that feeling of déjà vu? A year ago the world fretted about European debt, and more specifically,about Greece. Now investors are focussed on the same sort of issues, concerned that a sovereign country could default on its debt obligations.
• A year ago we took the view that the issue would not become serious enough to derail the global expansion and we stick by that view. In its own right Greece is the 26th largest economy in the world and about a quarter the size of Australia. But as one analyst has observed in the US, Greece is around the size of the Dallas-Fort Worth area.
• But of course the key concern is not about Greece per se, but about the risk of contagion. If Greece fails, that creates problems for the countries and banks that lent it money. And they may have to trim their exposures to other countries and banks. But a lot would still have to unravel for the global economy to be affected in a major way.
• China will provide the biggest contribution to world economic growth this year, adding  just over 0.8 percentage points to the expected 4.4 per cent growth rate. Then follows the US at 0.74pp, followed by India at 0.18pp and Japan at 0.10pp. You actually have to go a long way down the list to find European countries and the biggest countries – Germany and France – are by far the strongest and best able to absorb the shocks.
• Australian banks also have very small exposures to the problem countries in Europe. As our banking analyst at CBA, Ben Zucker, has observed, total exposure of our major banks to the problem European countries is $17.6billion or 0.69 per cent of total assets.
• And the biggest exposure by Australian banks is to one of the biggest countries – around $10 billion to Italy. Of that total, NAB has around $5.5 billion but its chief financial officer has stated publicly that Italy would need to fail for NAB’s holdings of short-term Italian government bonds to be affected.
• In short, the world is worrying unduly about the European debt issue causing a new crisis for the global economy. And domestic and foreign investors are worrying unduly about the crisis affecting Australian banks in any material way. As always when these issues come along, more disciplined longer-term investors get presented with buying opportunities.

The week ahead

• Each change in season is ushered in with a barrage of new economic data. So brace for the ‘winter whirlwind’ with no fewer than a dozen key indicators to be released in Australia over the next fortnight with a Reserve Bank Board meeting thrown in for good measure. In the US, the focus will be on Friday’s job figures.
• In Australia, the week kicks off on Monday with the “Business Indicators” release from the Bureau of Statistics. This publication contains estimates on sales, profits, wages and inventories with all the indicators expected to be on the soft side. Not only did the floods affect results, but also the high Australian dollar and soggy consumer spending. Profits are tipped to fall 1.7 per cent with inventories down 0.2 per cent.
• On Tuesday the Reserve Bank will release lending (private sector credit) figures while data on home prices will be issued by RP Data and Rismark. And the Bureau of Statistics issues data on building approvals, government spending and the balance of payments. Credit probably lifted 0.4 per cent while home prices were likely flat in April and dwelling approvals may have lifted 2 per cent with house sales recovering.
• On Wednesday the economic growth figures for the March quarter are released. The Reserve Bank has already flagged that the economy likely contracted in the quarter with the Queensland floods and cyclone having a major impact. A fall of around 0.1 per cent is on the cards, but forecasts will be firmed up after data is released over Monday and Tuesday. The Reserve Bank said it would “look through” the impact of the floods, but the recent rash of weak economic readings has reduced the likelihood of a June rate hike.
• On Thursday, international trade and retail spending figures for April are released while on Friday the latest data on tourism and migration flows are released. Retail trade fell by 0.5 per cent in March after a 0.8 per cent lift in February. But while a 0.6 per cent rebound in sales is possible in April, the point worth noting is that the timing of Easter holidays always poses problems for interpretation of the March and April data.
• In the US, the first week of the month always sees the spotlight shine on the monthly job data (non-farm payrolls) and this month is no different. But as well as the employment figures, the ISM manufacturing and services gauges will be closely-watched, together with figures on home prices, consumer confidence and auto sales.
• The week kicks off with a public holiday on Monday followed by the Case-Shiller home price series, consumer confidence data and regional manufacturing gauges on Tuesday. Home prices may have eased 0.1 per cent inMarch but the timelier consumer confidence reading for May is tipped to show an improvement.
• On Wednesday the ISM manufacturing gauge is released alongside the ADP employment survey, Challenger job layoff series and data on auto (car and truck) sales. The ADP series is expected to show a 175,000 lift in jobs butthe ISM manufacturing gauge may have eased from 60.4 to around 59.0.
• On Thursday, figures on factory orders and productivity are issued while the non-farm payrolls survey dominates Friday’s agenda alongside the ISM services gauge. Forecasters are tipping an increase in new jobs of around190,000. But with more looking for work, the jobless rate is expected to hold at 9 per cent. And the ISM service sindex is expected to have been little-changed in May, around a reading of 53.0. Any reading above 50 suggeststhat the services sector is growing.
• Overall the impression is likely to be that the US economy remains on the recovery road, but it will take far stronger readings than the consensus forecasts to advance thinking about when the Federal Reserve will shift from easy monetary policy settings to a more neutral stance.

Sharemarket

• We have been reluctant to trim our short-term forecasts for the sharemarket, but the Euro debt worries have lowered the bar. Overall, it appears more the case that investor jitters, rather than fundamentals, have shifted, but as was the case a year ago, we are awaiting concrete actions by European policymakers to restore stability. In addition, a combination of soft domestic consumer spending and a higher Australian dollar will prompt more earnings downgrades in the next few months. Clearly the economy is not performing as strongly as either the Reserve Bank or Federal Treasury had assumed. We now expect the All Ordinaries to be around 4,800 points at end June, rather than 4,950 (ASX 200 at 4,700). And by end year, the All Ords is expected to be around 5,000-5,100 (ASX 200 at 4,900-5,000).

Interest rates, currencies & commodities

• Near-term expectations of interest rate hikes have clearly softened. A rate hike in June is seen as a 7 per cent chance by financial markets participants. In addition a rate hike by August is seen as only a 20 per cent chance and indeed a rate hike is not fully factored in over the next year. How quickly sentiment can swing.
• Our commodity strategists are tipping prices to remain relatively firm in the short-term before easing over much of 2012. The CBA commodity price index is expected to end 2011 up by around 19 per cent before easing by around 7 per cent in 2012. At the end of 2011 the gold price is seen around US$1400 an ounce with oil near US$112 a barrel. And while gold and oil are both seen little changed over the course of 2012, this masks some significant shifts over the year. And bad news for cotton farmers, with prices tipped to ease from US154c per pound currently to US75c/lb by the end of 2012.

The post Investor Signposts: Week Beginning May 29 2011. appeared first on AdviserVoice.