looking for evidence of a sustainable recovery (ext: Edge)

Investors will now be looking for evidence of a sustainable recovery. This will be the key towards sustaining momentum for global stock markets, as stock prices have generally priced in a strong recovery in the economy and earnings momentum.

At the conclusion of its two-day policy meeting in the middle of last week, the Federal Reserve said that the US economy appears to be "levelling out" instead of its previous assessment of shrinking at a slower pace, bolstering expectations of an imminent recovery. The central bank also held interest rates steady at near zero.

The US economy does appear to be bottoming out, but the recovery is patchy.

US unemployment dropped marginally — and unexpectedly — to 9.4% in July 2009. However, data released last week showed the recovery was still tepid and a consumer spending-led recovery remains some way off. Weekly filings for unemployment benefits came in unexpectedly higher, suggesting the labour market remains weak — despite the drop in July's unemployment rate.

US retail sales for July were also much weaker than forecast. Retail sales fell 0.1% as the government's auto subsidy programme drove car sales. But sales excluding cars and gasoline fell by 0.4% and marked the fifth consecutive monthly decline.

With US consumers opting to spend less to build up their savings, repair battered balance sheets, buffer negative home equity and prepare for uncertainties in a weak labour market, chances are high that the recovery process could look quite slow.

Meanwhile, an unexpected rise in second-quarter gross domestic product (GDP) in Germany and France boosted hopes for a recovery in the euro zone economy. GDP in the euro zone fell in the second quarter, albeit by a marginal 0.1%, but Germany and France emerged from recession with GDP rising 0.3% quarter-on-quarter (q-o-q).

Elsewhere, China also released a slew of economic data for July. Inflation was in line with expectations but industrial output and urban fixed-asset investment growth were weaker than expected. China's industrial output grew 10.8% year-on-year (y-o-y) in July 2009, slightly below expectations of 11.5%, but still a strong growth figure. The bigger worry there is probably how the government will soak up excess liquidity generated by aggressive bank lending and stimulus packages.