Investors unnerved by a sell-off in shares and collapsing currencies are looking ahead to a week that may see a new round of coordinated central bank action to calm markets as well as corporate earnings and key economic data.
The US Federal Reserve is widely expected to cut rates sharply this week in the face of mounting turmoil that has hit the United States and the developed economies of Europe as well as emerging markets in Asia and Latin America.
Advance third-quarter US economic growth data due on Thursday is expected to show a 0,5% contraction in gross domestic product after 2,8% growth in the previous quarter. ”Increasingly, the signs point to a deep and synchronised global recession,” JPMorgan economist Bruce Kasman said. ”It is still too early to accurately gauge the depth of the downturn, as the outlook depends on how well policy actions contain the financial crisis.”
The likelihood of the Fed slashing interest rates by 50 basis point stood at 74% on Sunday and at 26% for a cut of 75 basis points to 0,75%.
Asian and European leaders closed ranks over the weekend to bolster confidence among investors who fear that the worst financial crisis in 80 years has ushered in a deep and damaging world recession.
Fend off risks
”We must use every means to prevent the financial crisis impacting growth of the real economy,” Chinese Prime Minister Wen Jiabao said at the end of a two-day summit of 43 Asian and European leaders in Beijing.
China’s central bank governor Zhou Xiaochuan was on Sunday quoted as saying that Asia’s second-largest economy is in good condition but needed to be on guard to fend off risks created by the turmoil.
Officials in Russia said its central bank has the means to control sharp fluctuations in its currency, but does not yet see the need to limit capital movements or change the rouble’s trading corridor.
”Just because the global financial crisis has hit our shores, does not mean that the rouble has to be significantly devalued,” the bank’s first deputy chairperson Alexei Ulyukaev said.
Governments have pledged about $4-trillion to support banks and restart money markets to try to stem the crisis and are considering tougher financial rules to guard against any repeat.
Foreign exchange analysts said extreme currency volatility, which has seen moves of a staggering 10% on some big rates on Friday alone, could see the Group of Seven or 20 top central banks intervening soon to stabilise world markets.
Earnings gloom
The US dollar surged to two-year peaks versus a basket of currencies as dismal European economic data reinforced investor fears of a global recession. The yen soared to multi-year highs versus the dollar and euro on the ensuing risk aversion, while at its low on Friday the British pound suffered its biggest one-day percentage drop against the US currency since September 1992.
Market participants will also be bracing for new signs of weakness in corporate earnings and gloomy statements on the future in what is going to be a heavy week of quarterly earnings reports.
Last week, Sony shocked investors when it unveiled a drop in profit and slashed its earnings outlook, reflecting weaker demand for its cameras and television sets. Its shares fell 13%.
US companies reporting earnings this week include United States Steel, Procter & Gamble, Legg Mason, Kraft Foods, MetLife, and Sun Microsystems.
In Europe, reporting companies include Banco Santander, Alcatel-Lucent, France Telecom and Deutsche Bank. – Reuters