Bank of America Turns Up the Heat on Emerging Markets

By FX Empire Analyst - Barry Norman
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The euro rose against the dollar for the first time in four days on Monday as investors pared bearish bets, but doubts about the ability of the European Central Bank to rein in the region's debt crisis should keep the currency under pressure.

A rich seam of U.S. economic data due this week will help influence investors' take on the market, with the prospect of Draghi's promise pit against the possibility of more monetary stimulus from the U.S. Federal Reserve.

If there is disappointment on Tuesday's release of July retail sales, currently forecast to rise 0.3 percent versus a drop of 0.5 percent in June, the U.S. dollar would likely come under pressure. Weaker data adds to the argument for the Fed to launch a third round of quantitative easing in hopes of boosting economic activity.

The safe-haven Japanese yen showed little reaction to weaker-than expected economic growth in Japan in the April-June period. The sluggish economic activity raised expectations that the Bank of Japan and the government were ready to provide additional stimulus, a move that could push the yen lower in the near term.

Emerging-market stocks headed for their biggest drop in more than a week as Bank of America Corp.’s reduced forecast for Chinese economic growth overshadowed a rally in energy producers on higher oil prices.

US equities fell, with the S&P 500 Index ending its longest rally since 2010, and commodities declined amid concern about slowing Asian growth. The euro gained as Italy sold all the debt it planned at an auction and Greece’s economy shrank less than forecast.

Americans’ drive to rebuild savings and pay down debt may mean the gains from the current mini boom in mortgage refinancing will accrue over years rather than have a more immediate effect on the US economy.

In Europe, German Chancellor Angela Merkel returns to the front line of the European debt crisis this week as the bloc’s leader's squabble over measures including bond purchases to relieve concerns the single currency may fragment.

German 10-year government bonds declined after a report showed that Greece’s economy contracted at a slower pace in the second quarter and Italy sold its maximum target at an auction of 364-day bills.

This morning in Asia, China’s stocks fell by the most in almost a month after Bank of America Corp. cut its economic growth forecasts for China and on speculation the government won’t loosen monetary policy as property prices rebound.

Most Japanese stocks fell as the nation’s economy expanded less than estimated. Trading volume on the Topix Index was at its lowest this year as the country started its weeklong summer festival.

Gold rose by 0.14% after the European Central Bank president said policy makers will do whatever is needed to preserve the euro and amid  increasing expectations of further stimulus measures in the US. But market concerns remain.  Some physical “buying” of gold from Europe this week spiked the bullion price, while the amounts have been “quite small” so far. Silver also rose by 0.06%.

Oil rose by 0.10% for the first time in three days in New York on concern eased that rising  economic worries faltering demand of oil will be overcome in the world’s biggest crude consumer.  Brent crude squeezed margins and has begun stifling demand from petrochemical makers. Also geopolitical rhetoric between Israel and Iran was ratcheted up a notch.

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