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World Week Ahead: More earnings and the Fed

Monday 31st October 2011

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Halloween is likely to be a lot less spooky than it appeared to be mere days ago with October set to close as the best performing month for Wall Street in decades.

But the last 30 days have been a wild ride.

Earlier this month, the Standard & Poor’s 500 Index came within 1 percent of falling into a bear market - shedding 19 percent since April. Since then it has recovered 17 percent, according to Bloomberg News.

Similarly, the Dow Jones Industrial Average, after gaining more than 3 percent last week, is on track for its biggest monthly increase in a quarter century.

The catalyst for last Thursday’s surge in stock prices was the unexpected ability of European Union leaders to finally agree on concrete plans for getting their fiscal house in order even though that enthusiasm fizzled on Friday.

The clearer picture after the European deal “should give a green light for many funds to get back in risk assets,” Robert Francello, head trader at hedge fund Apex Capital, told Reuters.

This week will be a busy one. The key economic data on tap is the US government's monthly report of payrolls scheduled for Friday. A Reuters poll of economists showed expectations that employers created 95,000 jobs in October.

Investors will also look to earnings from companies including Lowes and Pfizer to confirm that the US recovery is on track as indicated in last week’s data showing the economy expanded 2.5 per cent in the third quarter, its best performance in a year.

More than 100 US companies are set to report results in the next five days. It’s been a positive quarter so far. About 70 percent of the more than 300 companies that have reported earnings for the past quarter exceeded analysts’ expectations, according to Reuters.

Investors are cautiously optimistic. Tobias Levkovich, a New York-based US equity strategist at Citigroup, told Bloomberg News he expects the S&P 500 to extend gains through the end of the year. He forecast the index will end 2011 at 1,325, a 3.1 percent gain from yesterday’s close.

“We’re not off to the races into a new bull market, but we are going to trade to the upside,” Levkovich said. “Valuations look pretty attractive, earnings expectations are starting to get more realistic and credit conditions have been fairly reasonable.”

In Europe, major banks in Britain including Barclays and Standard Chartered are slated to report results this week too. And on Tuesday, investors will receive the first official estimate of British gross domestic product for the three months to September. Growth is expected to be modest at best, after grinding to a near halt in the second quarter.

Not to be forgotten, the US Federal Reserve’s Open Market Committee is meeting this week and will release a statement on Wednesday in Washington. While a change in interest rates is not expected, the central bank might give more clues on its plans to boost both growth and employment.

As for the euro zone, it’s not out of hot water yet. Italy had to pay up to find buyers for bonds it sold on Friday. Mario Draghi, newly in charge of the European Central Bank, will preside over his first policy meeting this week and may signal a change in strategy.

Leaders from the Group of 20 nations will meet in France on Thursday and Friday and no doubt will offer their view on what’s happening in the world.

While volatility eased dramatically this past week - the Chicago Board Options Exchange volatility index is at its lowest since early August - investors have shown it doesn’t take much to spook them.


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