GLOBAL MARKETS WEEKAHEAD-Greece, Greece, oh and yes, the Fed

LONDON: Given the questions hanging over investors -- potential sovereign debt default, slowing global growth, higher interest rates, surging oil prices -- a contrarian might think 2011 is actually going pretty well, according to a Reuters report on Friday, June 17.
Nearly half way through the year, world stocks are only slightly lower than they were at the beginning of the year, the currency that is supposed to be under threat, the euro, is actually stronger, and companies are doing fine.
It points to an investment community that has far from given up the ghost, with many still holding on to the belief that the second half will bring with it renewed economic vigour to put things back on track.
But at the same time, investors are very cautious. Which means that they are going to need a shove -- one way or the other -- before they choose a firm direction.
The Greek debt crisis, currently personified by anti-austerity street riots, government reshuffling and stratospheric yields and bond-insurance prices, obviously has great shove potential.
Investors, for the most part, still seem confident that the European Union and International Monetary Fund will solve the problem in the short term -- hence the lack of stock market panic.
But some doubts are creeping in, primarily because of the vehemence with which some Greeks are reacting to internal reform and cost-cutting efforts. Unruly default is no longer completely ruled out.
Dollar funding costs for euro zone banks have risen and European bank shares have hit their lowest level in nearly two years.
Even long-time believers in the ability of the euro zone to sort things out are sounding more concerned.
"The big open question is whether Greece will accept the strings attached to current and future support," Holger Schmieding, chief economist at Germany's Berenberg bank, said in a note. "Tail risks are serious."
The coming week is almost certain to be volatile as a result of the deepening Greek crisis. An EU summit towards the end of the week may provide some clarity.
Investors are not, of course, worried about Greece itself because it is an economic minnow. The fear is of contagion to other, larger countries such as Spain and of the hit that many banks would take on their Greek debt holdings if there were a default.

FED UP
Beyond the euro zone debt crisis, investors are also seeking clarity on the true state of the economic slowdown and on the direction of monetary policy.
The coming week should provide some new fodder.
The key event will be the meeting of the U.S. Federal Reserve on Tuesday and Wednesday and the accompanying press conference by Fed Chairman Ben Bernanke.
Investors have been preparing for the end of the Fed's asset-buying quantative easing programme, known as QE2, with some wondering whether some form of QE3 will be forthcoming because of the stagnant U.S. recovery.
Bill Gross, the co-chief investment officer of PIMCO, the world's largest bond fund manager, has said, for example, that he expects a QE3 to take the form of interest rate caps on 2-3-year Treasuries.
Others are less persuaded that the Fed will feel the need to add to policy that already includes ultra-low interest rates.
"The Fed will acknowledge the weaker macro data without promising any new action," Sarasin bank told its clients. "The conclusion is likely to be that not much change or action should be expected from the Fed in the second half of 2011."
Even without a QE3, meanwhile, Treasuries have the potential to outperform core German debt as there is little sign of U.S. tightening while the European Central Bank has already embarked on that course.
Bank of New York Mellon says its custodial flow data has shown less demand for German and French debt in the past two to three months, a shift from the safe-haven buying of such paper that had been seen in the past 15 months.
The ECB's commitment to tightening, however, will to a certain extend depend on the robustness of the euro zone economy.
There will be a snapshot on Thursday when flash estimates for the euro zone manufacturing and services come out, one of first takes on how June is progressing.
They are expected to show a further decline, but not to signal any major retrenchment from relatively good growth. - Reuters

Written by Reuters