World week ahead: Equities to extend rally

Monday 11th October 2010

While the past weekend gathering of finance leaders in Washington may help ease some currency market tensions, investors are still betting heavily on further efforts by global central banks to stoke economic growth.

The main focus is, unsurprisingly, on the US Federal Reserve. A continuing mix of data and hints from Fed officials themselves suggest the central bank is preparing a second round of asset buying. (Minutes from the latest policy meeting will be released this week.)

Against this backdrop, risk is being flattened and that could spark another run on equity markets, depending on the strength of corporate earnings from America’s top companies. Alcoa initiated the third-quarter results season with a solid report last week. This week Intel, JP Morgan Chase, Google and General Electric will weigh in.

"Good news is clearly good and the market goes up," John Praveen, chief investment strategist at Prudential International Investments Advisers told Reuters.

And if earnings or economic data disappoint, then a second round of quantitative easing will follow, bolstering equities.

“In that sense, risk is asymmetric,” Praveen said.

To recap, both the Dow Industrial Average and the Standard & Poor’s 500 closed on Friday at their highest levels since May. Last week, the Dow increased 1.6% to 11,006.48, while the S&P 500 added 1.7% to 1,165.15.

More than 40 stocks in the S&P 500 rose to 52-week highs on Friday, according to Bloomberg after the latest report on the US labour market pointed to continuing weakness as both governments and companies shed more jobs than expected in September.

Technical analysis of the S&P 500’s latest advance suggested that “the market isn’t casually challenging resistance, but rather, is doing so with authority,” according to Christopher Verrone at Strategas in New York.

The S&P 500 has surged through four “resistance levels” in the past month, according to a note that Verrone wrote for clients as reported by Bloomberg. The index has risen 13% since July 2.

The prospect of Fed action also helped spark gains in European equities last week, despite the European Central Bank indicating that it will focus on winding down its easy lending actions. The Stoxx 600 was up 1.2% last week.

Ahead of the weekend, there was a high degree of anxiety about foreign-exchange markets and intervention by several central banks to check their currencies. Both the Ukraine and India this past weekend indicated they might soon intervene to limit their currencies’ fluctuations.

On Friday the greenback slumped to a fresh 15-year low against the yen, prompting concern that the Bank of Japan will soon re-enter the currency market.

Jens Nordvig, head of G10 foreign-exchange strategy at Nomura in New York, told Reuters "the risk of a sizable US dollar short-covering rally" was building.

The value of the dollar's net short position rose to US$30.5 billion in the week ended October 5, compared to a net short of US$22 billion the previous week, according to Reuters and Commodity Futures Trading Commission calculations.

That was the largest bet against the US currency since at least June 2008, Reuters reported. A short position is a bet that a currency will decline in value.

Hang on.

Businesswire.co.nz

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