"There is a lot of money on the sideline that needs to be put to work"

By Margreet Dietz

Key indicators on the world's largest economy will likely set the direction for markets on both sides of the Atlantic in coming days.

Investors will scrutinise data on US consumer confidence, gross domestic product and non-farm payrolls during a holiday-shortened week for American financial markets. Wall Street is closed Monday for Memorial Day.

There are expectations for signs of improvement in the labour market in May. US payrolls climbed by 150,000 workers after a 115,000 gain in April, according to the median forecast of 68 economists surveyed by Bloomberg News ahead of Labor Department figures due on June 1.

“We have a labour market that’s improving, but not the kind of job growth that would really propel the recovery to a stronger phase,” Julia Coronado, chief economist for North America at BNP Paribas in New York, told Bloomberg.

The European sovereign debt crisis will remain a drag on the global outlook as a Greek election next month is set to determine the credibility of the euro at the same time as Spain's deepening woes risk dragging the single currency zone further into a quagmire of widening budget deficits.

Despite the increasing level of concern about the future of the euro zone, equities recovered last week as valuations had become attractive enough for investors to commit more funds. Without a fresh catalyst, the rally may prove short-lived.

In the past five days, the Dow Jones industrial Average advanced 0.7 percent, the Standard & Poor's 500 Index climbed 1.7 percent and the Nasdaq Composite Index gained 2.1 percent.

The S&P 500 closed at 1,317.82 on Friday. Analysts have pointed to the 1,275 to 1,280 range for the S&P index, just below the 200-day moving average, as a key level of support.

"You are looking at 1,277 on the downside. The market will test it, but when it gets there it is going to hold because there is a lot of money on the sideline that needs to be put to work," Ken Polcari, managing director at ICAP Equities in New York, told Reuters.

The euro suffered for yet another week, shedding 2.1 percent against the greenback. The battered currency fell as low as US$1.2496, the weakest since July 2010, and dropped below 100 yen for the first time since February.

“Uncertainty is high, growth is poor and a Greek exit is a wild card,” Aroop Chatterjee, a currency strategist at Barclays Plc’s Barclays Capital unit in New York, told Bloomberg. “It’s unlikely that the euro finds a bottom for a while even in a good state of the world.”

The future of the euro zone will remain in limbo for now. Greek elections are scheduled for June 17. The key question is whether a new government will adhere to the conditions of the country's second international financial bailout, or throw them out along with Greece's membership of the euro zone.

Meanwhile, trouble keeps deepening in Spain, too. On Friday, Bankia said it needed more money than initially estimated to avoid collapse, Catalonia said it needed federal help to refinance its debt, and Standard & Poor’s cut the credit rating of previously downgraded Bankia as well as four other Spanish banks.

While the euro crisis has repercussions that stretch far beyond Europe, some see the upside for American investments.

"With sovereign debt default now a possibility, and some form of dissolution of the euro also possible, the hidden positive may be for the US dollar, and US dollar-denominated assets," Brad Lipsig, vice president of investments and senior portfolio manager at UBS Financial Services in New York, told Reuters.

"Capital inflows could support US real estate prices, which could help stabilise US banks," Lipsig said. "All of this could help support US stock prices during a difficult period for Europe's economy. It's not inconceivable that this dynamic could trigger a rally in the US stock market."

(BusinessDesk)