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Eyes on Fed as banks, flu fears weigh on economy

Eyes on Fed as banks, flu fears weigh on economy
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First Published: Wed, Apr 29 2009. 03 15 PM IST
Updated: Wed, Apr 29 2009. 03 15 PM IST
Singapore: Investors looked to US GDP data and the Federal Reserve later on Wednesday for signs of recovery in the world’s biggest economy, but concerns that US banks may need more capital dented hopes the financial system was stabilising.
President Barack Obama asked Congress for $1.5 billion to fund the US response to swine flu, as new cases of the virus around the world prompted fears of a pandemic that could snuff out any tentative upturn in the struggling world economy.
“The timing couldn’t be worse. It may also end up serving as a barrier to global trade,” Mark Zandi, chief economist with Moody’s Economy.com said of the flu outbreak.
The Federal Reserve was expected to make a statement around 1815 GMT at the end of a two-day policy meeting. With interest rates already near zero, analysts were looking for any moves to inject more money into the financial system and the central bank’s assessment of the state of the economy.
“The main focus will be on the Fed and whether there are any signs from them supporting the ‘green shoots´ theory,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney.
Green shoots?
First quarter US gross domestic product numbers were due at 1230 GMT on Wednesday. The median forecast was for a contraction of 4.9% on a annualised basis, but estimates ranged as deep as an 8% drop.
“Business investment and inventories will subtract drastically from growth, but if our view of a 2.8% contraction is correct, risk will certainly get another boost,” said Alan Ruskin, chief international strategist at RBS Global Banking and Markets.
The yen fell and Asian stocks gained on hopes the data will show the pace of contraction easing. Those hopes were encouraged on Tuesday by a jump in US consumer confidence in April and signs the pace of house price declines slowed in February.
The US housing market slump was at the heart of the financial crisis, with huge losses on risky loans triggering a dramatic drying up of credit that precipitated the worst global economic slump in six decades.
“Those are the green shoots that everybody’s been talking about but you still have a lack of clarity on the timing and parameters of the recovery,” said Jim Awad, managing director at Zephyr Management in New York.
Shares were also expected to see modest gains in Europe, where a raft of companies were reporting earnings.
The euro zone’s biggest bank, Spain’s Santander, beat forecasts, although first quarter net profit still fell 5% as provisions against loan losses hit the bottom line.
The world’s largest steelmaker, ArcelorMittal, reported slightly worse-than-expected first-quarter results, but forecast a modest pick-up in the second quarter.
The global downturn has slashed demand for everything from cars to household appliances, hitting steelmakers, miners and metals processors. Destocking has exacerbated the problems.
Better-than-expected first quarter results had raised hopes that US banks, kept afloat with massive infusions of public money, could have made it past the worst of the crisis.
But on Tuesday people familiar with the matter said Citigroup may have to raise more capital after receiving preliminary results of its “stress test” by regulators, while the Wall Street Journal said Bank of America may need billions of dollars of new capital.
Bloomberg, citing people briefed on the matter, reported on Wednesday that at least six of the banks that underwent the tests required extra capital. Official results of the stress tests are expected next week.
There was more bad news for the financial sector from Australia, where ANZ bank, the country’s fourth-largest lender, reported a bigger-than-expected 43% drop in half-year cash profit as bad debt charges doubled.
“In my bones, I expect further trouble,” said ANZ Chief Executive Mike Smith, delivering a bearish outlook that helped knock the bank’s shares down 5 percent.
Flu cases rise
Asian share markets outside Japan, which was closed for a holiday, mostly gained on Wednesday, regaining some ground from a two-day slide caused by worries about the U.S. financial sector and the potential of a new strain of flu to become a pandemic.
The virus, known as H1N1, has killed more than 150 people in Mexico. Milder symptoms have appeared in countries including the United States, Canada, Spain, Britain, Israel and New Zealand.
Last year, the World Bank estimated that a flu pandemic could cost $3 trillion and cause a nearly 5% drop in world gross domestic product by forcing cuts in travel, trade and manufacturing output.
Airline shares have been hit by fears of a sharp drop in traffic and oil prices fell towards $49 a barrel.
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First Published: Wed, Apr 29 2009. 03 15 PM IST