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World Week Ahead Finally, the Fed meets

Monday 17th June 2013

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The clear focus this week is on the US Federal Reserve and any clues on its plans for the future of its monthly bond-buying program.

The Federal Open Market Committee starts a two-day meeting on June 18. Fed Chairman Ben Bernanke last month suggested the central bank might reduce the pace of its buying. Bernanke will host a news conference after the FOMC releases its latest policy statement.

While the World Bank reduced its forecast for global economic growth last week as well as for China, the world's second-largest economy, American data such as May's retail sales has increasingly showed an economy holding firmly to a path of cautious yet sustainable recovery.

While a strengthening economy is good news for corporate profits, it has also heightened expectations that the Fed will take its foot off the stimulus pedal as Bernanke alluded to four weeks ago and that has kept Wall Street from returning to the record highs it reached earlier this year.

"What [Bernanke] has done is create what I call an early summer market storm, not a huge one but enough to cause people to become a little nervous," Fred Dickson, chief market strategist at DA Davidson & Co in Lake Oswego, Oregon, told Reuters.

And this week might not necessarily bring further clarity.

"There's lots of confusion around the world at present about what central bank policy means for the outlook of the global economy, earnings and valuations," Matthew Sherwood, the Sydney-based head of investment market research at Perpetual, told Bloomberg News. "The Fed is likely to continue to be ambiguous about its next step, probably because it's not sure. This will see markets continue to be volatile."

Last week, the Dow Jones Industrial Average declined 1.2 percent, while the Standard & Poor's 500 Index fell 1 percent. The Dow is still up 16.4 percent since the start of the year, while the S&P 500 has gained 15.2 percent.

"There is no change in the bullish outlook and [the] recent rally is expected to resume soon for a new high [for the S&P 500] above 1,687.18," according to strategists at The index ended last week at 1,626.73.

However, Action.Forex cautioned that if the S&P 500 were to fall through what is seen as the next lower, key technical support of 1,598.23, it could trigger a further pullback towards 1,555.8 or below. During the last 52 weeks, the benchmark has traded between 1,309.27 and 1,687.18.

US Treasuries have also taking a beating since Bernanke's Congressional comments in May and signs of a sustained US economic pick-up. Yields on the 10-year bond climbed to 2.29 percent, the highest in 14 months, last Tuesday. Demand at last week's US$66 billion of debt auctions was muted. The 10-year yield reached a 2013 low of 1.61 percent on May 1.

Still, the rise in yields might not be bad altogether, some say.

"The market could have overreacted to tapering, and this brings us back to solid ground," Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald in New York, told Bloomberg News.

The latest clues on the US economy will come in the form of data on the consumer price index and housing starts, due on Tuesday, as well as reports on weekly jobless claims, existing home sales, PMI manufacturing, leading indicators and the Philadelphia Fed Survey, all due on Thursday.

In Europe, the Stoxx 600 Index dropped 1.5 percent last week, the fourth consecutive week of declines.

Economic reports due in the coming days include Germany's ZEW economic sentiment, out on Tuesday, and euro-zone PMI manufacturing and services, out on Thursday

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