Hold the bubbly for another week

By Jeremy Gaunt, European Investment Correspondent

LONDON (BestGrowthStock) – All the ingredients of the year’s biggest conundrums pepper the coming week, making chances of investors being able to slip away early for the Christmas/New Year break slim.

The final full week of trading for 2010 brings a Federal Reserve meeting that will update on asset-buying quantitative easing, a European Union summit on stabilizing the euro zone debt crisis, and a slew of data to sound check global recovery.

It comes amid signs that investors are increasingly expecting 2011 to be relatively good for riskier assets, with an improving global economy, good corporate balance sheets, and plentiful liquidity driving things forward.

The Reuters 2011 Investment Outlook Summit in the past week showed many investment managers banking on more gains from emerging markets, with other stock regions, including Wall Street, also doing well.

Commodities and credit were also cited as part of the reflation trade.

This can be seen already in the performance of the MSCI all-country world stock index (.MIWD00000PUS: ), up only around 8 percent for this year, but gaining close to 3 percent in less than two weeks of December.

The volatility of 2010 has helped make stocks seem cheap to investors. Data from Thomson Reuters Datastream suggests a 12-month forward price-to-earnings ratio of 12 times for the all-country index. It compares with a 10-year average of 15.

“The equity risk premium is so high, it’s easy for equities to go up and we have at least 20 percent more to look forward to in the next year or two,” Jim O’Neill, chairman of Goldman Sachs Asset Management, told the Reuters summit.

By contrast, the sustainability of ultra-low yields being offered by benchmark government bonds is suddenly being questioned.

The yield on the 10-year U.S. Treasury shot up as much as 20 basis points on Wednesday as a combination of the expectations about an improving U.S. economic climate and worries about increasing deficits prompted a sharp selloff.

Bond markets, already jittery in Europe over the potential for default in some euro zone peripheral economies, will be under particularly scrutiny in the coming week.


For investors to see their 2011 predictions take concrete form, a few things will have to take place or be avoided. Three of them are on display in the coming week.

First, the Federal Reserve meets on Tuesday to discuss their plan to spend $600 billion in government debt to pump more liquidity into the system.

It is not expected to change the plan — which is seen as supporting riskier assets through stimulus — but the past week’s deal between the White House and Republicans in Congress to extend Bush-era income taxes, including a surprise reduction in payroll taxes, has injected a new element into the debate.

Some economists have said the extra boost from the tax deal reduces the likelihood of the Fed having to expand the QE program, which has implications for bond investors at the least.

Next up for investors is the end-of-year EU summit on Thursday and Friday in Brussels. Top of the agenda will be the euro zone debt crisis, which has haunted financial markets twice this year — first in May/June when Greece needed a bailout, then in November when Ireland did.

A 750 billion euro ($1 trillion) EU/International Monetary Fund temporary package is already in place, but markets have questioned whether that is enough should the crisis spread to Portugal, Spain and even Italy.

Debate is expected mainly to be about a new, permanent mechanism for handling crises after 2013.

Consensus, drawn from the Reuters summit and various investment bank outlooks, appears to be that EU authorities will do what is needed to stop the crisis getting out of hand. But few, if any, expect it is going away for good.

“While the European debt crisis will probably continue to generate volatility, it is not likely to be the trigger that ends the recovery in economic growth and financial markets,” Barclays Capital said in their 2011 outlook.

That said, any perception of inaction from the leaders in the coming week could set off the market jitters again, as could too much emphasis on investors taking the hit in the case of a default.

The third of the week’s key events is a raft of economic data including European PMI manufacturing data and U.S. retail sales, industrial production and inflation reports.

Given that much of the investment flows for next year are predicated on a recovering global economy, investors will be watching for any last minute — or, at least, last month of 2010 — unpleasant surprises.

(Additional reporting by Dominic Lau, Mark Felsenthal and Luke Baker; Editing by Toby Chopra)

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Hold the bubbly for another week