FINANCIAL ANALYSIS
By Chris Weafer
The dominant sentiment in all global markets is one of nervousness. Nervousness that Europe’s debt problems may worsen and threaten the pace of economic recovery in the region; nervousness that China’s efforts to contain inflation growth may slow demand for imported materials; nervousness that events across the Middle East may yet worsen and drive the price of oil to a level that also damages the growth outlook. That sentiment is unlikely to change much this week and, perhaps not for several weeks. For investors that means avoiding risk assets and stocking to defensive themes until some of these issues are resolved or stabilized (see Stock Watch below).
The eurozone and the euro will hold centre stage at the start of this week and that will be a big contributory factor to where the dollar-euro rate trades. The dollar remains one of the major factors in the oil and metals market and a driver of sentiment towards risk assets generally. EU Finance Ministers are scheduled to meet early this week to decide on what action is required to resolve Greece’s debt problem. The yield on Greek debt and the CDS market all clearly show that investors are pricing in a high risk of Greek debt restructuring, albeit most expect a fresh bailout as part of that restructuring
Last week the dollar extended the previous week’s rally as investors reverted to the US currency as a haven to escape the threat of a worsening debt problem in the eurozone and the threat to growth in Asia as China introduced further measures to slow credit growth. The dollar gained 1.4% against the euro to close at $1.4118.
Gold staged a strong rally early as traders took the view that a price below $1,500 per ounce is unjustified. But the mid week strength did not hold as the dollar rally undermined the case for haven assets. Gold fell 0.9% on Friday to cut the five-day gain to 0.1% and the closing price to $1,493.6 per ounce.
The full note, with this week’s Stock Watch, diary, weekly funds flow analysis, tables showing the best and worst share performance of last week and year to date can be downloaded here Download Russia_Week_May_17_11.
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