The week ahead

There’s no shortage of real economy data this week, but the main focus for markets is the two day EU Council summit, which begins on Thursday. The FT comments “…the stakes are high as markets wait for further clarity on recent talk of greater eurozone integration. As heads of state, leading EU officials and central bankers assemble, global investors will be hoping that – aside from talks on the future of Greece within the euro, the funding of future bailouts and greater fiscal and banking union – some form of growth-supporting initiative will be discussed”.

Certainly negotiations on various measures that support growth do appear to have made progress, and there may be decisions taken and communicated on boosting the capital resources of the European Investment Bank, reallocation of structural funds, and the commencement of project bonds, although is this decision was taken, it would likely involve only a modest scale. However, it is likely that markets will have to wait for material progress on the broader challenges facing Euroland, with Germany having clearly signalled that it is not prepared to take or endorse more radical steps towards debt mutualisation. This in effect rules out early issuance of so-called Eurobonds, where capital is underwritten jointly and severally by the member participants of the Euro project. It also suggests no early adoption of the redemption fund proposal, or direct involvement in bank recapitalization by the EFSF/ESM.

Germany’s preference for gradual progress to fiscal and political union via treaty changes, rather than ongoing reliance and use of short term fixes, clearly suggests that markets will receive no early and lasting relief on the issue of sovereign bond distress.

As to what’s already in prices, if the media and analysts’ commentaries are anything to go by, investor expectations are modest, although there was a noticeable rally in the pricing of risk-sensitive assets last week. That said, if there is an apparent lack of progress, it may be that bears attempt to test the nerve of politicians and policy makers but taking prices lower with speculative short positions.

On the US front, this week’s data are likely to be mixed in tone, leading up to the June ISM data next week. Based on lead indicators, it looks as if the risk to activity data is on the downside, but the downside risk is unlikely to be sufficient to encourage further easing from the FOMC. There are regional manufacturing survey data for Dallas out today, Richmond on Tuesday, Kansas on Thursday and Chicago on Friday. Forecasters are projecting relatively stable numbers for each of the surveys. The consumer confidence data due on Tuesday could disappoint, looking at what’s projected on consensus and what pieces of the jigsaw are already known. Thus the number last month, May, was 64.9, the consensus for June is 63.5, but a joining of the dots suggests that we could see a number as low as 58.0. This would not be welcome, but the really important data set for the week for the US is likely to be the May durable goods report out on Wednesday. The consensus expectation is for 0.5% mom progress after no progress in April.

There are also interesting numbers due for Japan this week and the key piece of data is likely to be the May industrial production report due out on Friday. The consensus forecast is for a deline of 2.8% month on month. Data at this type of level would be consistent with expectations that the Bank of Japan is likely to ease further in coming months, although it is unlikely that there would Quantitative Easing on a scale sufficient to damage the yen seriously.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange
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