* Markets set to take stock of Bernanke comments, economy
* Quiet week of data, focus on markets instead
* New signs global economic growth hitting soft patch
* Period of moderation likely lies ahead for stocks
By Andy Bruce
LONDON, May 26 As evidence mounts that a
mid-year slowdown taking place in the world economy, the next
few days will offer a clearer glimpse of how that will impinge
on policymaking and buoyant financial markets.
Global stocks stumbled last Thursday in one of the few times
the grey economic reality cut through this year's reverie in
And that could mark the start of a trend, after Federal
Reserve Chairman Ben Bernanke last week hinted the U.S. central
bank could soon scale back its monthly bond purchases that have
flooded stock markets with new cash.
Some poor business surveys from China have also had an
impact, suggesting the world's No.2 economy is struggling for
While there is little in the way of major economic data this
week that will send chills through stock markets as happened on
Thursday, there is a renewed sense of caution in the market.
"The underlying momentum in the global economy is weaker
than it should be at this point of the economic cycle, five
years after the global crisis," said Lena Komileva, director of
G+ Economics consultancy in London.
"We have yet to see evidence of a convincing, self-sustained
positive feedback loop between real growth and market value
Hope that market confidence would filter through to the real
economy was memorably described as "positive contagion" by
European Central Bank President Mario Draghi in January - in
hindsight perhaps more in hope than expectation.
Growth is still proving to be elusive for the euro zone
economy, largely thanks to the extent of the budget austerity
taking place across the continent.
On Wednesday, the European Commission will release its
review of its countries' debt-cutting policies, which will
confirm that the likes of France, Spain and Slovenia are to be
given more time to trim their budget deficits to target.
The Organisation for Economic Co-operation and Development's
semi-annual review of the world's major economies will come out
on the same day, having identified global economic activity
"picking up" in its interim assessment in March.
Now, the world economic growth seems to be moving into a
soft patch, although there is no sign of anything that will curb
Last week's purchasing managers indexes showed factory
activity in China declined slightly for the first time in seven
months, while in the United States manufacturing grew at its
slowest pace since October.
"These surveys suggest that the Chinese economy is doing a
bit worse than expected and the euro zone marginally better, but
they do not alter our view that global growth will remain weak,
and imbalanced, for the rest of this year," said Andrew
Kenningham, senior global economist at Capital Economics.
He noted, however, that economies like the UK and Japan that
weren't covered in last week's PMIs have performed better than
expected in recent months, so the global economy could be
slightly stronger than the surveys implied.
Since last Thursday's stock markets wobble, analysts are
largely agreed that period of moderation, rather than a big
correction, lies ahead for risk assets.
European markets have been particularly sensitive to shifts
in sentiment over the last few years, and three Italian
government bond auctions next week will provide more clues on
Spanish yields rose at auction for the first time in three
months in the past week, and the Italian auctions will provide
further interest because they will be the first since Fed
Chairman Bernanke hinted that waves of new cash from central
banks will not go on forever.
Governments in the euro zone's most vulnerable economies,
like Spain and Italy, have benefitted hugely from reduced
borrowing costs resulting from easy cash flowing out from the
Fed and Bank of Japan, and into their bonds.
That of course applies to stock markets too, and Bernanke's
intervention will set a new tone on global bourses in the coming
weeks, marked by increased uncertainty.
The Euro STOXX 50 Volatility Index, Europe's widely
used measure of investor risk aversion, surged 13 percent to a
three-week high last Thursday alone.
"We remain positive on equities in general ... (but) more
broadly, equity markets may lose some momentum now that they
must worry about stimulus withdrawal," said Guy Foster, head of
portfolio strategy at Brewin Dolphin.