Oct 13: We have a big week ahead

[dan_s]

It took the markets a while to bounce back from their May slide. But starting in mid-June, global capital has gradually moved back to a risk-on stance. The S&P 500 is up about 13 percent from its June 4 low. US oil has backed off a bit since breaking $100/bbl in mid-September but is still up about 19 percent from the low it hit June 28. Brent crude—the world price of black gold—is now back above $115/bbl.

Gold prices have climbed back to within a stone's throw of their February highs. And Treasury yields, although still near historically low levels, have inched back up to about 1.66 percent.

The switch back to more aggressive assets the past few months is hardly dramatic. But it does have roots in several promising trends that, if they continue, could lead to considerably more robust global growth next year. Those include an improving US jobs market, Europe's baby steps toward resolving its credit woes and China's fiscal stimulus.

The question is will these trends continue and keep the risk-on trade going, or will they stall and send global markets into hard reverse once more as we saw in May?

Much attention this week is focusing on developments in the euro zone crisis. This week, International Monetary Fund Managing Director Christine Lagarde went public to urge Germany and other European Union hardliners to give Greece and Spain more time to meet their austerity targets. That's understandably raising concerns that consensus is fraying in the EU, putting recovery efforts at risk.

The Chinese Puzzle

The greater concern for global growth now, however, is from the other side of the world. Over the next week or so, China will release a raft of economic data for September and third-quarter calendar 2012, ranging from headline third-quarter gross domestic product (GDP) growth to inflation.

The GDP figure due out Thursday will be the most widely watched number for good reason. Mainly, it will indicate whether the slowdown in growth of the world's second-largest economy is at last moderating, and hopefully provide clues to the location of the bottom.

The inflation figure (Monday) will demonstrate the efficacy of government policies to rein in price increases—and thereby provide an indication of how much room the mandarins have to continue trying to pump up growth. There's also trade data due out Saturday, which will be used by many as a forecaster of what's to come Thursday.

Beijing is in the midst of a generational leadership change that could shape the country's governance for years to come. That's further increased uncertainty in global markets, given China's growing importance to the global economy.

The near-term concern, however, revolves around what a continued deceleration of Chinese growth would mean to the world. Particularly bad news this week would almost certainly set investors into a risk-off mode. Conversely, a real indication that the slowdown is at an end would remove a very big cloud now hanging over global markets. That in turn would likely induce more risk-on bets in the year's closing months, which are often quite seasonally bullish.

Commodity-rich Australia and Canada are two countries with a lot of skin in the game, and their currencies and stock markets will almost certainly respond to the news from China next week. The US also owes a considerable amount of its resiliency the past three plus years to the Middle Kingdom's continued growth.

The good news is that expectations are already low. The Asian Development Bank is now forecasting full-year GDP growth of between 7.7 percent and 8.1 percent in 2013 for China. That's down from 8.5 percent and 8.7 percent, respectively in its April forecast. The forecast is fueled in part by a recently reported 22-month low for China's purchasing manager survey of its service sector in September.

Encouragingly, that number did indicate the country's economy is still growing, just at a slower rate. So did a similar figure for China's manufacturing sector. And the country may well be getting a lift from an unexpected source, mainly the US economy where both manufacturing and non-manufacturing activity appears to be picking up.

In addition, this week the US also reported a sharp increase in consumer confidence, with the Thomson Reuters/University of Michigan preliminary October index hitting 83.1. That's up from 78.3 last week, and it's far better than the Bloomberg consensus estimate of 78.

[prince_jake_33]

Dan Thanks for this analysis. Having a general view of the future certainly adds to the evaluation of individual stock. I need both and probably a lot more, I dont know much about, to direct my investments .
I subscribe to James Stacks Investech service to help with the general market trends and to glean any sudden changes.

[dan_s]

IMO, unless there is a major slow down in China, the demand for oil will continue to increase. If Rhomney gets elected, I think the U.S. economy picks up next year. We have an interesting few months ahead.

Q3 results are going to be very strong for the Sweet 16.