Illuminated euro sign in front of the Frankfurt headquarters of the European Central Bank, which announces its interest rate decision Thursday.KAI PFAFFENBACH/Reuters
Many stocks look cheap these days. In fact, by some measures, equities have reached their lowest valuation since the financial crisis in March, 2009.
The problem for the market is that the prospect of a cooling global economy – and perhaps a fall in corporate profits – is chilling investor enthusiasm. This week, all eyes will be on central bankers and U.S. President Barack Obama for clues about where business activity is headed next.
On Wednesday morning, the Bank of Canada will announce its decision on the target for the key overnight rate. Economists are expecting the central bank to signal that low interest rates will be with us for some time, given that it recently downgraded its economic outlook.
The next day, both the Bank of England and the European Central Bank announce their separate policies with regard to interest rates.
Many European officials and economists are calling for the ECB to reverse its recent monetary tightening and cut interest rates to lessen the blow of austerity measures in member countries. Any decrease by the ECB will spell bad news for the euro, which is again under pressure. Last Friday, it ended its worst week ever against the Swiss franc, down nearly 5 per cent.
Indeed, Europe could prove the wild card for the week as tensions grow over the continent's unco-ordinated approach to managing the sovereign debt crisis.
Jens Weidmann, president of Germany's Bundesbank, recently blasted the ECB for its new policy of buying government bonds of stressed member states, principally from Spain and Italy. He and other German officials insist such payments should come from the bail-out fund set up last year, claiming that the ECB is exceeding its mandate. But the European Financial Stability Facility (EFSF) has not been sufficiently financed to take on such a role for any meaningful length of time. The EFSF has also been hampered by the veto power European parliaments have over its operations.
On Wednesday, Germany's Bundestag votes on a new EFSF package while the country's constitutional court rules on the very legality of the fund. Germany is footing much of the bill to bail out weaker members, and the court must decide whether the EFSF breaches European Union law and the country's own fiscal sovereignty.
European sovereign default risk hit a record last week, based on the Markit iTraxx SovX Western Europe Index of credit-default swaps insuring the debt of 15 governments. If the euro zone's bail-out fund shows signs of disintegrating, European bond markets could face turmoil and North American stocks would get sideswiped.
On Thursday, attention will refocus on the U.S. as Federal Reserve chairman Ben Bernanke addresses the Minnesota Economic Club in Minneapolis. Although the Fed's Federal Open Market Committee isn't scheduled to meet to discuss ways to help the economy until Sept. 20, some hope Mr. Bernanke will use his speech to offer advance insight.
Paul Ashworth, chief U.S. economist at Capital Economics, says the speech could prove the highlight of the week for the markets. "In the wake of [last week's]poor payrolls report, markets will be looking for any hint that Bernanke and his Fed colleagues are now willing to act more aggressively," he said.
On Thursday evening, Mr. Obama is to address a joint session of Congress on his plans to create jobs, stimulate the economy and rein in the deficit. It is an important speech given that the Fed warned last week that it has limited powers to fix the economy and urged politicians to take the lead.
But given the hostile environment in Washington, it's questionable how much impact the President's words will have. Remember that Mr. Obama couldn't even get his request for a Wednesday joint session approved by House Speaker John Boehner, who in an unprecedented move told the White House the date was inconvenient. Mr. Obama, in his usual manner, acquiesced.
"It's difficult to imagine meaningful legislation being sparked by this speech," said Benjamin Reitzes, senior economist at BMO Nesbitt Burns.