By Rodrigo Campos | Reuters
NEW YORK (Reuters) - Wall Street hit the panic button last week and survived. But the shocks have left investors stranded.
Following its worst week in almost three years, the S&P 500 has fallen into correction territory and year-end forecasts are already being lowered. Safe havens like gold and the Swiss franc rallied.
Economic growth has slowed and budget-cutting legislation recently passed in the U.S. Congress could further dampen economic activity.
That leaves the path uncertain. So what are investors to expect in the weeks ahead?
"In a word, volatility," said Citigroup strategist Jamie Searle.
The CBOE Volatility Index <.VIX>, the market's gauge of anxiety, had its largest daily percentage spike since early 2007 on Thursday.
Another source of worry was thrown into the mix late on Friday when Standard & Poor's stripped the United States of its top-notch triple-A credit rating. In its report on the action, S&P sounded pessimistic that U.S. lawmakers could reach the consensus needed to rein in deficits that were responsible for this ratings cut.
"The long-term implications are daunting," said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. "Short-term, Treasuries remain a premier safe-haven refuge."
The downgrade was seen as compounding uncertainty in Europe, which is facing its own issues related to government debt.
Germany and France on Sunday reiterated their commitment to implementing the decisions of last month's emergency EU summit, in an effort to restore confidence in turbulent financial markets.
The finance ministers of the G7 major powers are "very likely" to hold a conference call later on Sunday to discuss turmoil in the financial markets, according to a British Treasury source, but no details were immediately available.
NO MAGIC FIX SEEN FROM THE FED
Until June, equity investors could count on the Federal Reserve to keep pumping money into the financial system, boosting equity and commodity prices. The $600 billion the Fed used to buy assets in a second round of quantitative easing -- known as QE2 -- flooded markets with cash and helped lower interest rates.
But that is over now.
Following a political showdown in Congress that took the United States to the brink of a debt default amid a bitter battle to rein in spending, few expect more fiscal stimulus. And additional action from the Fed is unlikely after its meeting Tuesday.
"There is certainly not going to be any fiscal stimulus coming, given the debt situation we are in," said Paul Mendelssohn, chief investment strategist of Windham Financial Services in Charlotte, Vermont.
"You've got so much discord and so much dysfunctionality in Washington that (Fed Chairman Ben) Bernanke has to think twice before he does anything."
Fears of another recession have crept back, fed by flagging economic growth and a perceived inability of politicians on both sides of the Atlantic to deal with escalating government debt.
In Europe, a credit crisis that initially hit Ireland, Greece and Portugal escalated and now threatens to engulf Italy, the euro zone's third-largest economy. Bond yields soared last week to highs not seen in more than a decade, worrying investors about Rome's ability to finance -- and balance -- its budget.
During the afternoon of New York's Friday market session, Italy pledged to speed up austerity measures and social reforms in return for European Central Bank help with funding.
The European Central Bank faced a decision on Sunday whether to buy Italian bonds to try to prevent the euro zone debt crisis from widening.
PANIC BEGETS PANIC
Having fallen in nine of the last 10 sessions, the S&P 500 <.SPX> closed the week down 7.2 percent -- its biggest percentage drop since the third week of November 2008.
Selling was broad as average daily volume for the week soared to 11.6 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq. That represents about a 55 percent jump from what was until last week the yearly average of nearly 7.5 billion.
Frantic moves in markets like the ones seen last week go beyond curbing investor confidence. Nervous consumers hold off on spending and corporations do not sell their products and services so earnings do not rise and stock prices fall, creating a vicious cycle.
"We're facing years of markets that will be at times scary and chaotic and that won't be providing the kinds of returns people want to expect from investments," said Rob Arnott, chairman of Research Affiliates in Newport Beach, California, who oversees $80 billion in assets.
"Most people think double-digits in the past was not difficult so, 'I'm going to be conservative and expect 7 to 8 percent.' But that's not what the markets are priced to give you -- it's more like 3 to 5 percent," Arnott said.
Following downgrades to U.S. gross domestic product estimates and weak global figures on factory and services sector activity, hopes for a boom in the second half of the year have evaporated.
"I just don't think 3 percent GDP growth in the second half is anywhere close to realistic at this point," said Keith Davis, a bank analyst and principal at money manager Farr, Miller & Washington in Washington, D.C. "The third quarter is starting off pretty slow, and people are bringing down their numbers."
Credit Suisse equity strategists on Friday cut their year-end estimate for the S&P 500 by 7 percent to 1,350 from 1,450, with 1,400 as the target for year-end 2012.
Contrarian views are nevertheless ready to dismiss the panic and take it as a good time to jump back in.
"The biggest fear in our mind is: 'Is it a self-fulfilling prophecy? Is the market volatility causing people to really pull back?'" said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas.
"I think you'll see things kind of calm down over the weekend, and I suspect next week will be a better week for the market as people calm down and reassess the situation," he added.
Monday, August 8, 2011
Debt issuers brace for impact from U.S. downgrade
By Paritosh Bansal and Dan Wilchins | Reuters
NEW YORK (Reuters) - A downgrade of United States' top-tier credit rating has Wall Street scrambling to figure out the knock-on effects for the financial system, from mortgages to banks to markets that rely on U.S. Treasuries for collateral.
The immediate effects of the Standard & Poor's downgrade of the country's AAA credit rating late on Friday are likely to be modest, largely because it was expected and already at least partly discounted, experts said.
Many downplayed the likelihood of the sort of financial contagion experienced when Lehman Brothers went under in September 2008. Few had expected it to have to file for bankruptcy, and few were prepared for the fallout. Money market funds froze, some major commercial banks collapsed, and many major dealers and finance houses teetered on the edge of failure.
But even if that type of scenario is unlikely this time, bankers, lawyers and investors wonder if there could be longer-term consequences of S&P's downgrade, given that U.S. sovereign credit is bedrock to the world financial system.
The analysis is complicated because so many of the potential stress points for the financial system are relatively opaque areas like over-the-counter derivatives markets.
Adding to the difficulties is the concern that the downgrade is only one of the many issues roiling global markets. The European debt crisis is spreading, with Italy and Spain coming under the gun after Greece, and data in recent weeks point to a weaker U.S. economy than many investors had thought and have led to fears of another recession.
"I actually think it is going to end up having more of an impact than some of the news stories are suggesting," said Thomas Stoddard, a senior managing director at Blackstone Group who focuses on financial services investment banking.
"Not having the U.S. as triple-A is just going to pop up in more places and have more frictional costs than people might suspect," Stoddard added.
A number of entities that are key players in the U.S. financial system -- including mortgage finance companies Fannie Mae and Freddie Mac, and securities clearinghouses like the Options Clearing Corp Depository Trust Co -- are likely to be downgraded by Standard & Poor's on Monday.
For Fannie Mae and Freddie Mac, losing their triple-A rating could lift borrowing costs, potentially making mortgages more expensive for consumers and adding to stress in the already unstable U.S. housing market.
Last month, S&P said it may also cut ratings for companies like the Depository Trust Co, which facilitates payment transfers among major banks, and several Federal Home Loan Banks and Farm Credit System Banks.
On Friday evening, when S&P cut the United States' sovereign rating by one notch to "AA-plus," it said it would offer more detail about the ratings for these companies on Monday.
DERIVATIVES MARKETS
Another source of potential stress is derivatives markets, where investors and banks often collateralize their positions using U.S. Treasuries.
If banks start demanding more Treasuries to collateralize the same exposure, investors could be forced to sell assets to come up with extra collateral, causing broader market declines. As long as Treasury yields are at all time lows, that risk seems relatively low, said a hedge fund trader who spoke on condition of anonymity.
Some derivatives transactions may have ratings triggers built into them that unwind the deals if the U.S. is downgraded, the trader said, but he said it is difficult to know how many such transactions are out there.
OCC, the world's largest equity derivatives clearing organization, said on Sunday it has no current plans to adjust its current valuations or haircuts on Treasuries used as collateral.
There are some factors working in markets' favor, analysts noted.
For one thing, major U.S. banks are better capitalized as credit losses have slowed. The U.S. banking system had $1.51 trillion of equity capital at the end of the first quarter, compared with $1.29 trillion in the fourth quarter of 2008. That roughly 17 percent of extra capital is supporting about 3 percent fewer assets than it used to.
If stresses become strong in areas like the repo market, a massive market that banks use to fund securities short-term, dealers are fairly sure the Federal Reserve can jump in to offer support, as it did during the credit crunch, the trader said.
Any impact in the derivatives market will be less than what the pessimists fear, said Michael Holland, founder of asset manager Holland & Co. "I don't expect major disruptions in markets just from the downgrade."
BORROWING COSTS
Borrowing costs for companies with top ratings like Microsoft Corp and Exxon Mobil Corp could drop, because triple-A rated debt may be even more attractive to some investors now, analysts said. Some companies have at times had more available cash on their balance sheets than the U.S. government in recent weeks.
In general, corporate borrowing costs may not rise following the U.S. downgrade. Last week, when many in the market were expecting the U.S. to be downgraded, six U.S. companies issued 30-year bonds, which is unusually long-dated for the corporate market.
Even highly-rated corporate bonds have seen their risk premiums rise in recent sessions, signaling that portfolio managers are still concerned about credit risk. As turmoil in Europe ratchets higher, those risk premiums may rise more. But investors' willingness to buy long-term corporate debt signals some confidence in the sector.
"To a certain extent, corporate debt may look even more attractive, especially cash-rich balance sheet companies with lots of liquidity," said Chip MacDonald, a financial services partner at law firm Jones Day.
STATE FINANCES
States that rely heavily on federal government spending -- such as Virginia and Maryland, which are home to many federal employees and defense contractors -- could suffer if Congress and President Barack Obama slice the federal budget more deeply.
A downgrade of Fannie Mae and Freddie Mac would affect billions of dollars of debt issued by public housing authorities secured by federally guaranteed mortgages.
Hospital credits could be weakened if the federal government slashes programs such as Medicaid -- the health plan for the elderly, poor and disabled that accounts for as much as 30 percent of state spending. Stocks in the health care sector sold off last week, amid fears of declining government support for spending in the sector.
"The degree of dependence on the federal government now becomes a state credit issue," said Philip Fischer a managing principal at eBooleant Consulting, in a recent report.
S&P is also expected to immediately downgrade pre-refunded bonds. When municipal bonds are refunded, investors are typically repaid from Treasuries held in escrow.
Debt issued by AAA-rated universities and colleges with global reputations might rise in price, said Evan Rourke, a portfolio manager, with Eaton Vance, citing Harvard and Princeton as examples.
Indeed, the immediate impact of the downgrade might be muted by the tax-free market's traditional strengths.
"I don't see a tremendous flight out of municipals. You might see credit spreads widening for lower-rated issues but we also think a lot will hold their ratings," Rourke said.
(Reporting by Paritosh Bansal and Dan Wilchins, additional reporting by Joan Gralla, Ben Berkowitz and Ann Saphir; Editing by Marguerita Choy)
NEW YORK (Reuters) - A downgrade of United States' top-tier credit rating has Wall Street scrambling to figure out the knock-on effects for the financial system, from mortgages to banks to markets that rely on U.S. Treasuries for collateral.
The immediate effects of the Standard & Poor's downgrade of the country's AAA credit rating late on Friday are likely to be modest, largely because it was expected and already at least partly discounted, experts said.
Many downplayed the likelihood of the sort of financial contagion experienced when Lehman Brothers went under in September 2008. Few had expected it to have to file for bankruptcy, and few were prepared for the fallout. Money market funds froze, some major commercial banks collapsed, and many major dealers and finance houses teetered on the edge of failure.
But even if that type of scenario is unlikely this time, bankers, lawyers and investors wonder if there could be longer-term consequences of S&P's downgrade, given that U.S. sovereign credit is bedrock to the world financial system.
The analysis is complicated because so many of the potential stress points for the financial system are relatively opaque areas like over-the-counter derivatives markets.
Adding to the difficulties is the concern that the downgrade is only one of the many issues roiling global markets. The European debt crisis is spreading, with Italy and Spain coming under the gun after Greece, and data in recent weeks point to a weaker U.S. economy than many investors had thought and have led to fears of another recession.
"I actually think it is going to end up having more of an impact than some of the news stories are suggesting," said Thomas Stoddard, a senior managing director at Blackstone Group who focuses on financial services investment banking.
"Not having the U.S. as triple-A is just going to pop up in more places and have more frictional costs than people might suspect," Stoddard added.
A number of entities that are key players in the U.S. financial system -- including mortgage finance companies Fannie Mae and Freddie Mac, and securities clearinghouses like the Options Clearing Corp Depository Trust Co -- are likely to be downgraded by Standard & Poor's on Monday.
For Fannie Mae and Freddie Mac, losing their triple-A rating could lift borrowing costs, potentially making mortgages more expensive for consumers and adding to stress in the already unstable U.S. housing market.
Last month, S&P said it may also cut ratings for companies like the Depository Trust Co, which facilitates payment transfers among major banks, and several Federal Home Loan Banks and Farm Credit System Banks.
On Friday evening, when S&P cut the United States' sovereign rating by one notch to "AA-plus," it said it would offer more detail about the ratings for these companies on Monday.
DERIVATIVES MARKETS
Another source of potential stress is derivatives markets, where investors and banks often collateralize their positions using U.S. Treasuries.
If banks start demanding more Treasuries to collateralize the same exposure, investors could be forced to sell assets to come up with extra collateral, causing broader market declines. As long as Treasury yields are at all time lows, that risk seems relatively low, said a hedge fund trader who spoke on condition of anonymity.
Some derivatives transactions may have ratings triggers built into them that unwind the deals if the U.S. is downgraded, the trader said, but he said it is difficult to know how many such transactions are out there.
OCC, the world's largest equity derivatives clearing organization, said on Sunday it has no current plans to adjust its current valuations or haircuts on Treasuries used as collateral.
There are some factors working in markets' favor, analysts noted.
For one thing, major U.S. banks are better capitalized as credit losses have slowed. The U.S. banking system had $1.51 trillion of equity capital at the end of the first quarter, compared with $1.29 trillion in the fourth quarter of 2008. That roughly 17 percent of extra capital is supporting about 3 percent fewer assets than it used to.
If stresses become strong in areas like the repo market, a massive market that banks use to fund securities short-term, dealers are fairly sure the Federal Reserve can jump in to offer support, as it did during the credit crunch, the trader said.
Any impact in the derivatives market will be less than what the pessimists fear, said Michael Holland, founder of asset manager Holland & Co. "I don't expect major disruptions in markets just from the downgrade."
BORROWING COSTS
Borrowing costs for companies with top ratings like Microsoft Corp and Exxon Mobil Corp could drop, because triple-A rated debt may be even more attractive to some investors now, analysts said. Some companies have at times had more available cash on their balance sheets than the U.S. government in recent weeks.
In general, corporate borrowing costs may not rise following the U.S. downgrade. Last week, when many in the market were expecting the U.S. to be downgraded, six U.S. companies issued 30-year bonds, which is unusually long-dated for the corporate market.
Even highly-rated corporate bonds have seen their risk premiums rise in recent sessions, signaling that portfolio managers are still concerned about credit risk. As turmoil in Europe ratchets higher, those risk premiums may rise more. But investors' willingness to buy long-term corporate debt signals some confidence in the sector.
"To a certain extent, corporate debt may look even more attractive, especially cash-rich balance sheet companies with lots of liquidity," said Chip MacDonald, a financial services partner at law firm Jones Day.
STATE FINANCES
States that rely heavily on federal government spending -- such as Virginia and Maryland, which are home to many federal employees and defense contractors -- could suffer if Congress and President Barack Obama slice the federal budget more deeply.
A downgrade of Fannie Mae and Freddie Mac would affect billions of dollars of debt issued by public housing authorities secured by federally guaranteed mortgages.
Hospital credits could be weakened if the federal government slashes programs such as Medicaid -- the health plan for the elderly, poor and disabled that accounts for as much as 30 percent of state spending. Stocks in the health care sector sold off last week, amid fears of declining government support for spending in the sector.
"The degree of dependence on the federal government now becomes a state credit issue," said Philip Fischer a managing principal at eBooleant Consulting, in a recent report.
S&P is also expected to immediately downgrade pre-refunded bonds. When municipal bonds are refunded, investors are typically repaid from Treasuries held in escrow.
Debt issued by AAA-rated universities and colleges with global reputations might rise in price, said Evan Rourke, a portfolio manager, with Eaton Vance, citing Harvard and Princeton as examples.
Indeed, the immediate impact of the downgrade might be muted by the tax-free market's traditional strengths.
"I don't see a tremendous flight out of municipals. You might see credit spreads widening for lower-rated issues but we also think a lot will hold their ratings," Rourke said.
(Reporting by Paritosh Bansal and Dan Wilchins, additional reporting by Joan Gralla, Ben Berkowitz and Ann Saphir; Editing by Marguerita Choy)
That 1937 feeling all over again
By Emily Kaiser | Reuters
SINGAPORE (Reuters) - Federal Reserve Chairman Ben Bernanke, an expert on the Great Depression, once promised that the central bank would never repeat its 1937 mistake of rushing to tighten monetary policy too soon and prolonging an economic slump.
He has been true to his word, keeping interest rates near zero since late 2008 and more than tripling the size of the Fed's balance sheet to $2.85 trillion. But cutbacks in government spending may end up having a similarly chilling effect on the economy, and there is little Bernanke can do to counter that.
Back in 1937, the U.S. economy had been growing rapidly for three years, thanks in large part to government programs aimed at ending the deep recession that began in 1929.
Then the central bank clamped down hard on lending, and federal government spending dropped 10 percent. The economy contracted again in 1938. The jobless rate soared.
"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again," Bernanke said back in 2002 at a conference honoring legendary economist Milton Friedman's 90th birthday.
Bernanke convenes the Fed's next policy-setting meeting on Tuesday, facing growing concern that the United States may be slipping into another recession while Europe staggers toward a deeper debt crisis. Standard & Poor's decision on Friday to lower the U.S. credit rating adds yet another element of uncertainty.
His options are limited.
Nigel Gault, chief U.S. economist at IHS Global Insight, said the Fed could promise to keep interest rates near zero or its balance sheet swollen for even longer than investors anticipate. Or it could buy even more U.S. government debt.
"It is hard to see any of these options as 'game changers,'" Gault said. "The Fed would be doing them not because it could be sure they would make a huge difference, but because it would feel the need to do something."
Gault put the odds of another recession at 40 percent.
However, Friday's U.S. employment figures soothed recession fears, showing the economy created 117,000 jobs in July. That was up from a revised 46,000 in June and prior months payrolls were revised up slightly. The unemployment rate slipped to 9.1 percent but mostly because workers dropped out of the labor force.
"While I do not think this sounds the all-clear signal, it does quell some of the conversation that the U.S. is falling back into a recession," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"Having said that, there are still plenty of headwinds, like Europe. I am also very encouraged to see the upward revisions to the previous months. This report pulls us back from the ledge a little bit."
HITTING A POTHOLE
Full employment is one of the Fed's prescribed goals, and it is clearly falling short. Government spending cuts are making matters worse. Friday's employment report showed a net loss of 37,000 government jobs last month.
State and local governments with balanced budget rules had little choice but to cut jobs in order to make ends meet. The federal government has no such restriction, but its spending outside of defense fell at a 7.3 percent annual rate in the second quarter, crimping economic growth.
Michael Feroli, an economist with JPMorgan in New York, said he had held out some hope that Congress would approve some form of additional fiscal support in the coming months, but the debt ceiling fight showed lawmakers dead set against that.
"It now looks likely that growth could hit a pothole early next year," Feroli said.
He cut his growth forecast for the first half of 2012 to 2.0 percent from 2.5 percent. At that sluggish pace, the jobless rate won't fall much below 9.0 percent, keeping the Fed on hold until at least the middle of 2013, Feroli said.
Without fiscal help, the Fed will be under greater pressure to find some other way to lift growth. Another round of government bond purchases would no doubt elicit wails of protest from emerging markets, which contend that the Fed's easy money spills into their economies, driving up inflation.
China, whose $1.16 trillion in Treasury holdings are second only to the Fed's, has not been shy about expressing its concern over the state of U.S. public finances and the dollar's slide.
Yang Jiechi, China's foreign minister, said on Friday that Washington should enact "responsible monetary policies" to ensure global economic stability, a thinly veiled reference to the Fed's bond-buying programs.
China releases its monthly economic data this week. The figures are expected to show double-digit gains in industrial output and retail sales, suggesting the country's economic growth remains robust.
Strong growth in China has helped to lift the rest of Asia, outside of Japan, which is still hurting from the March earthquake and tsunami. But all bets are off if conditions worsen significantly in the United States.
"Our view is that the region can 'decouple' from modest slowdowns, and we think the ongoing slowdown qualifies as modest," said TJ Bond, emerging Asia economist at Bank of America-Merrill Lynch in Hong Kong.
"We would start to worry if the U.S. tipped over into recession."
(Editing by Dan Grebler)
SINGAPORE (Reuters) - Federal Reserve Chairman Ben Bernanke, an expert on the Great Depression, once promised that the central bank would never repeat its 1937 mistake of rushing to tighten monetary policy too soon and prolonging an economic slump.
He has been true to his word, keeping interest rates near zero since late 2008 and more than tripling the size of the Fed's balance sheet to $2.85 trillion. But cutbacks in government spending may end up having a similarly chilling effect on the economy, and there is little Bernanke can do to counter that.
Back in 1937, the U.S. economy had been growing rapidly for three years, thanks in large part to government programs aimed at ending the deep recession that began in 1929.
Then the central bank clamped down hard on lending, and federal government spending dropped 10 percent. The economy contracted again in 1938. The jobless rate soared.
"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again," Bernanke said back in 2002 at a conference honoring legendary economist Milton Friedman's 90th birthday.
Bernanke convenes the Fed's next policy-setting meeting on Tuesday, facing growing concern that the United States may be slipping into another recession while Europe staggers toward a deeper debt crisis. Standard & Poor's decision on Friday to lower the U.S. credit rating adds yet another element of uncertainty.
His options are limited.
Nigel Gault, chief U.S. economist at IHS Global Insight, said the Fed could promise to keep interest rates near zero or its balance sheet swollen for even longer than investors anticipate. Or it could buy even more U.S. government debt.
"It is hard to see any of these options as 'game changers,'" Gault said. "The Fed would be doing them not because it could be sure they would make a huge difference, but because it would feel the need to do something."
Gault put the odds of another recession at 40 percent.
However, Friday's U.S. employment figures soothed recession fears, showing the economy created 117,000 jobs in July. That was up from a revised 46,000 in June and prior months payrolls were revised up slightly. The unemployment rate slipped to 9.1 percent but mostly because workers dropped out of the labor force.
"While I do not think this sounds the all-clear signal, it does quell some of the conversation that the U.S. is falling back into a recession," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"Having said that, there are still plenty of headwinds, like Europe. I am also very encouraged to see the upward revisions to the previous months. This report pulls us back from the ledge a little bit."
HITTING A POTHOLE
Full employment is one of the Fed's prescribed goals, and it is clearly falling short. Government spending cuts are making matters worse. Friday's employment report showed a net loss of 37,000 government jobs last month.
State and local governments with balanced budget rules had little choice but to cut jobs in order to make ends meet. The federal government has no such restriction, but its spending outside of defense fell at a 7.3 percent annual rate in the second quarter, crimping economic growth.
Michael Feroli, an economist with JPMorgan in New York, said he had held out some hope that Congress would approve some form of additional fiscal support in the coming months, but the debt ceiling fight showed lawmakers dead set against that.
"It now looks likely that growth could hit a pothole early next year," Feroli said.
He cut his growth forecast for the first half of 2012 to 2.0 percent from 2.5 percent. At that sluggish pace, the jobless rate won't fall much below 9.0 percent, keeping the Fed on hold until at least the middle of 2013, Feroli said.
Without fiscal help, the Fed will be under greater pressure to find some other way to lift growth. Another round of government bond purchases would no doubt elicit wails of protest from emerging markets, which contend that the Fed's easy money spills into their economies, driving up inflation.
China, whose $1.16 trillion in Treasury holdings are second only to the Fed's, has not been shy about expressing its concern over the state of U.S. public finances and the dollar's slide.
Yang Jiechi, China's foreign minister, said on Friday that Washington should enact "responsible monetary policies" to ensure global economic stability, a thinly veiled reference to the Fed's bond-buying programs.
China releases its monthly economic data this week. The figures are expected to show double-digit gains in industrial output and retail sales, suggesting the country's economic growth remains robust.
Strong growth in China has helped to lift the rest of Asia, outside of Japan, which is still hurting from the March earthquake and tsunami. But all bets are off if conditions worsen significantly in the United States.
"Our view is that the region can 'decouple' from modest slowdowns, and we think the ongoing slowdown qualifies as modest," said TJ Bond, emerging Asia economist at Bank of America-Merrill Lynch in Hong Kong.
"We would start to worry if the U.S. tipped over into recession."
(Editing by Dan Grebler)
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