Tipping point?
August 8, 2011
With Asian markets down on Monday and European exchanges showing mixed results in morning trading, investors have mixed opinions about what this week will bring as they wait for Wall Street to react to Friday's downgrade of the United States' credit rating.
The elephant in the room - that industrialized western nations have been living beyond their means for years now - was presented in a hard light on Friday by Standard & Poor's downgrading of US debt from AAA status to AA+.
The decision came after the US political establishment allowed the country to come within days of defaulting on its debt.
Markets can't be tricked
Stocks are expected to take major hits this week, as markets tend to react to bad news quickly and with volatility. Last week brought a preemptive draw-back, with Germany's DAX index suffering an historical weekly loss of nearly 13 percent.
Deutsche Bank's chief economist, Thomas Mayer, told the Bild am Sonntag newspaper that while he wouldn't rule out further losses, he isn't expecting a global market crash.
The situation gives new life to old fears. Investors worry the European debt crisis could spread uncontrollably, and that the US will continue to stagnate or even slip back into a recession.
Fears that none of the remedies prepared for the consumption-based US economy will work continue to haunt the markets. That worst-case scenario could drag the entire global economy down with it.
Focus on US economic data
This week, a number of important reports on the US economy will be released, which will surely influence the markets.
On Tuesday, the US Federal Reserve will announce its policy on interest rates, which have been kept near zero since late 2008. And traders are sure to watch closely whether the Fed resumes its interrupted stimulus program of buying government bonds to put fresh cash on the market.
On Thursday US weekly job market data will be announced, along with July's balance of trade data. The University of Michigan's consumer sentiment index for August will be released that same day. It measures several aspects of US consumers' willingness to spend.
Amidst all the troubles, there is one glimmer of hope. Better-than-expected US employment numbers caused the Dow Jones Industrial Average to jump 0.5 percent on Friday, indicating that a quick recovery is not completely out of the question.
Eyeing the reporting season
When market turbulence stacks up against real economic data, it can prove to be ephemeral. And companies are currently in the midst of their quarterly reporting season - a stock exchange highlight that will continue over the coming weeks.
The data released so far doesn't point to an economic collapse. While companies' futures have become more complicated, they're hardly looking at storm clouds on the horizon. That applies to US companies in particular.
Nord-LB financial expert Tobias Basse told Deutsche Welle there's cause for hope, and that despite "extreme economic pessimism and a panicked atmosphere" things could improve after the US reporting season.
Capital markets analyst Hans-Jörg Naumer of Allianz Global Investors also believes a recovery is coming. The most recent losses on stock markets around the world smack heavily of herd instinct, he said.
"We can still hope for a calmer market environment in the late summer," he told Deutsche Welle.
Experts at the Landesbank Berlin, however, caution against optimism. According to the bank's analysts, "the end of this volatile market phase, during which economic data and the debt crisis have been setting the pace, is not in sight."
Reports due out in Germany
For Germany's DAX index, a number of quarterly reports are on the immediate horizon. Energy concern E.ON, consumer goods manufacturer Henkel and Commerzbank are due to publish results on Wednesday, followed by fertilizer maker K+S ("Kali und Salz") and power giant RWE on Thursday and steel-maker Thyssen Krupp on Friday.
Across the Atlantic, US companies Walt Disney and AOL will present numbers Tuesday, while Nestle, Cisco Systems and News Corporation report on Wednesday.
Author: Robert Minde, ARD Börse / gps
Editor: Sam Edmonds