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||Asean Affairs 30 July 2012
Weekly Market Outlook
By Shayne Heffernan Ph.D.
Wall St staged a remarkable 2 day rally on the back of horrid economic data and a meaningless statement by Mario Draghi saying that the ECB would do “whatever it takes” to save the euro, which was widely interpreted to mean that the ECB would intervene in the bond market to bring down Spanish and Italian bond yields.
Economist Shayne Heffernan is of the opinion that the U.S. Federal Reserve and the European Central Bank meetings next week that investors expect to result in action to stimulate economic growth and, in the case of the ECB, tackle the spreading euro zone debt crisis, will fail.
And will fail in grand style, "what can be done? more money printing in the USA? the start of a massive Euro printing era? the economy in both the USA need to look for real growth however both have installed taxes, passed legislation and austerity measures that are directly slowing growth" Shayne Heffernan said.
Investors put to much faith in Drahgi last week and there are no real indications the US Fed is ready to act. The best side to be on in the current market is looking for a pull back and them buy undervalued equities, ass for futures we are short and looking to add to those positions on any rally leading up to Wednesday.
ASEAN Nations have held on well and will be value after a "no miracle cure" pull back.
<strong>While the Market Rally's America Sinks</strong>
Wall St investors may continue the buying ahead of a Fed statement Wednesday as traders and investors position themselves to make a short term profit.
Major companies due to report include AIG (AIG), Kellogg (K), Procter & Gamble (PG), Kraft Foods (KFT), Pfizer (PFE), MasterCard (MA) and General Motors (GM).
Weak consumer spending held growth to an annual rate of just 1.5 percent, even less than the 2 percent rate in the first quarter. And few expect the economy to accelerate in the second half of the year as Europe's financial woes and a U.S. budget crisis restrain businesses and consumers.
The growth estimate Friday from the government suggested that the U.S. economy could be at risk of stalling three years after the recession ended. Economists generally say even 2 percent annual growth would add only about 90,000 jobs a month. That's too few to keep up with population growth and drive down the unemployment rate, which is stuck at 8.2 percent.
Among the 290 companies in the S&P 500 index that have reported earnings for the second quarter, about 67 percent have beaten analysts' estimates, slightly higher than the long-term average of about 62 percent.
But just 40 percent have beaten on revenues, the worst record since the first quarter of 2009. Third-quarter earnings are now expected to decline 0.4 percent from a year ago, compared with an expected rise of 1.4 percent last week
Whatever it takes to Save the Euro</strong>
The reality is somewhat different, German finmin Wolfgang Schaeuble rejected speculation that Spain is about to request that the eurozone's bailout fund [EFSF] buy its bonds. While the country's high interest rates are "painful," it is "not the end of the world if you have to pay a few percent more at a few bond auctions," Schaeuble told the Welt am Sonntag newspaper.
Germany's Bundesbank dampened expectations for further action by the European Central Bank on Friday by upholding its resistance to the ECB buying bonds, a day after ECB President Mario Draghi raised expectations such a move could be on the cards.
The Bundesbank, which opposes the ECB's Securities Markets Program (SMP) because it treads too close to the central bank's ultimate taboo of state financing, said on Friday it was still not in favor of such a step. "The Bundesbank continues to view the SMP in a critical fashion," a Bundesbank spokesman said "The mechanism of bond purchases is problematic because it sets the wrong incentives."
While Draghi carries a fancy title, he has no way to force Germany to do anything, and has no other resources to manage the Euro. What is possible is that the ECB will become a real Bank and start printing trillions of Euro sending the currency lower, raising import costs and driving exports, this seems the only likely outcome.
Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.
Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.
If Spain, the euro zone's fourth biggest economy and the world's 12th, loses affordable market financing the next domino at risk of falling is Italy - the euro zone's third biggest economy and a member of the G7 group of big wealthy nations.
A bailout of Spain would probably be double those of Greece, Ireland and Portugal combined, while Italy's economy is twice as large as Spain's again.
The European Union has already agreed to lend up to 100 billion euros to rescue Spanish banks. One euro zone official said Madrid has now conceded that it might need a full bailout worth 300 billion euros from the EU and IMF if its borrowing costs remain unaffordable.
European officials have spent the past few days issuing a series of statements declaring they will act to halt the crisis.
Shayne Heffernan Ph.D.
Linda Johnson, Business Development Director - Private Client Group, Heffernan Capital Management
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