WORLD WEEK AHEAD: Room to rally

Monday 26th October 2015

The US Federal Reserve two-day policy meeting starting this Tuesday forms the key focus in the coming days after central banks in the euro-zone and China helped bolster financial markets with their commitments to fresh stimulus.

US corporate earnings including from Apple, Twitter, Ford, UPS, Time Warner Cable, Merck, Pfizer, Chevron and Exxon Mobil will also help set the tone.

Central bank support and better-than-expected results have helped boost sentiment on Wall Street. Last week, the Dow Jones Industrial Average rallied 2.5 percent, while the Standard & Poor’s 500 Index climbed 2.1 percent, and the Nasdaq Composite jumped 3 percent.

Microsoft, Alphabet, Amazon and Facebook kept pace with Friday’s advance, with room for further gains.

"There’s the almost certain prospect of an expanded asset purchase program from the European Central Bank, plus the larger easing from China," Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking in New York, told Bloomberg. "The combined impact of that is quite a powerful message for risk appetite."

The People’s Bank of China’s decision to lower interest rates as well as banks’ reserve requirements underpinned markets on Friday. On Thursday the ECB said it was ready to add fresh stimulus. The greenback surged, as a result.

The moves by the PBOC and ECB may give Fed policy makers additional reasons to hold off lifting the benchmark interest rate for the first time in nearly a decade. So far, policy makers including Chief Janet Yellen have repeatedly said they may still consider a rate hike in 2015.

"The ECB's move increases the probability of the Fed thinking twice about it," Marco Valli, the chief euro-zone economist at UniCredit in Milan, told Reuters. "They will want to give the impression that they remain on track to raise rates at the end of the year. But obviously, after the ECB played tough, they will seek to avoid giving the impression that they are pre-committed.”

The Federal Open Market Committee starts its two-day meeting on Tuesday. Bank of Japan policy makers also gather this week, with a policy statement due on Friday.

On Thursday, a report is expected to show the US economy expanded at an annualised 1.7 percent in the third quarter, according to a Reuters poll, down from 3.9 percent in the second quarter. Another reason why some Fed watchers say there’s no need to push rates higher now.

Beyond that, a slew of US economic data will arrive in the form of reports on new home sales and the Dallas Fed manufacturing survey, due today; durable goods orders, the S&P Case-Shiller home price index, PMI services, consumer confidence, and the Richmond Fed manufacturing index, due Tuesday; weekly jobless claims, and the pending home sales index, due Thursday; the employment cost index, Chicago PMI, and consumer sentiment, due Friday.

The latest round of US corporate earnings has offered reason for optimism. Shares of Microsoft jumped 10.1 percent on Friday after the company reported quarterly profit that exceeded expectations.

“We’re seeing great traction with businesses who want to bring Microsoft’s cloud, mobile device management technology and data analytics together to improve security and productivity resulting in almost 70 percent year-over-year growth in our commercial cloud run rate,” Kevin Turner, chief operating officer at Microsoft, said in a statement.

Shares of Alphabet, Google’s new parent company, also climbed, up 7.7 percent on Friday, on its better-than-expected quarterly results. And Amazon did not disappoint either, with its shares up 6.2 percent on Friday. Apple shares rallied in anticipation of its results due this Tuesday, with its stock closing 3.1 percent higher on Friday.

"The bar has been raised a bit on its earnings report from where it was a week ago," Michael James, managing director of equities trading at Wedbush Securities in Los Angeles, told Reuters. "The price action is telling you there's more optimism built into it."

In Europe, the Stoxx 600 Index added 2 percent on Friday to close at its highest level in two months.

Here, investors will eye reports on Germany’s IFO, due today; Germany’s GfK consumer sentiment, due Wednesday; Germany’s unemployment and consumer price index, as well as euro-zone confidence data, due Thursday; and the euro-zone unemployment rate and consumer price index, due Friday.

BusinessDesk.co.nz

Comments from our readers

No comments yet