G7 way short of the crease, fuels investor worries

London: Financial markets are showing no signs of dropping frenzied antipathy to risk and, with a Group of Seven meeting in Marseilles failing to pull off a major surprise, the mood will likely spill into the new week.

The euro zone crisis will also be a focus again with German politics and disagreement in the European Central Bank taking centre stage along with renewed concern, about Greece’s ability to meet its obligations.

[caption id=“attachment_81337” align=“alignleft” width=“380” caption=“The euro zone crisis will also be a focus again with German politics and disagreement in the European Central Bank taking centre stage along with renewed concern, about Greece’s ability to meet its obligations. Reuters”]  [/caption]

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Data from Lipper suggested a brief flirtation with stocks at the end of August has waned. Less than a net $600 million flowed into US equity funds in the week to Wednesday, compared with a net inflow of $6.3 billion in the previous week.

Meanwhile, 10-year US Treasury yields fell below 2 percent again during the week as investors sought relative safety.

So risk aversion is still in vogue. The G7’s lack of concrete proposals to turn around the slowing world economy will probably simply add to it.

Morgan Stanley said during the past week coordinated intervention may be on the cards, with the U.S. Federal Reserve, ECB, Bank of Japan and Bank of England all weighing in with a mix of interest rate cuts and asset-buying quantitative easing.

While Morgan Stanley suggested this might come as early as the G7 meeting, the meeting declared only that it was “committed to a strong and coordinated response to (the) challenges”. That will likely not be enough to satisfy investors increasingly demanding something more tangible than commitments.

Indeed, investors will be aware a German source said the statement itself was issued at the insistence of G7 host France because markets needed something to calm them.

Investors will have other events to focus on in the coming week, such as meeting of the US Congress’s “super committee” on deficit reduction and next weekend’s informal meeting of European Union finance ministers in Poland.

At each turn, market expectations tend to rise before the meetings then be disappointed. “Then it goes to the next meeting,” said Maarten-Jan Bakkum, equity strategist at ING Asset Management.

It’s the economy

The big issue facing investors, of course, is the state of the world economy. While the consensus view among many institutions has been that the major economies are going through a soft patch and growth should return in coming months, the extent of the slowdown has forced a rethink.

The Organisation for Economic Cooperation and Development said during the past week that growth in the G7 would average 1.6 percent on an annualised basis in the third quarter before slowing to 0.2 percent in the final three months of 2011.

Investment bank Credit Suisse raised the probability of a mild global recession to 25 percent from 20 percent.

All of which will put extra emphasis on a number of economic releases in the coming week, with one of the most interesting possibly being the Philadelphia Federal Reserve’s outlook on Thursday - last month’s was so poor it triggered a large stock market sell-off.

Other US data include consumer confidence on Friday and inflation on Thursday. The latter may be key to hopes for more quantitative easing.

Jeremy Armitage, head of research at State Street Global Markets, says the first and second rounds of QE were only possible because of an easing of inflation pressure. “We would expect QE3 to be off the table unless this level declines meaningfully,” he said.

Japan, meanwhile, issues the Tankan business sentiment survey on Thursday, which may give some update on the country’s recovery from the tsunami and earthquake disasters.

Investors will also still be weighing up US President Barack Obama’s job plan, a stimulus package to fight the country’s stubborn unemployment.

Immediate market reaction was muted, mainly because of the political difficulties enactment of the proposal may face.

Stark reality

The battered euro zone enters the new week still in the grip of the debt crisis. A new wrinkle is the early resignation of Juergen Stark, Germany’s top ECB official and the bank’s chief economist, at a time when there is disagreement over the bank’s policy of buying euro zone government bonds to combat the currency bloc’s debt crisis.

It underlined divisions within euro zone countries over how to handle bailouts of Greece, Ireland, Portugal and others who may need help, notably Italy and Spain.

International lenders are increasingly frustrated by Greece in particular over delays in reforms and missed fiscal targets. Prime Minister George Panadreou said at the weekend he would make the difficult decisions and sacrifices needed.

Most Germans voters remain opposed to paying for bailouts. That mood may be on display at the end of the week with state elections in Berlin, and at the EU finance ministers meeting.

There are also auctions of Italian and Spanish bonds, although these will not reflect pure investor demand because the ECB is buying in the secondary market to keep borrowing costs in check.

Germany, in the meantime, is losing its grip as the bloc’s economic powerhouse. The OECD predicted its economy would contract 1.4 percent in the fourth quarter.

Reuters