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World Week Ahead Optimism for equities

Monday 23rd December 2013

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The optimism triggered by the US Federal Reserve's decision to begin tapering its bond-buying program next month as the world's biggest economic recovery gathers speed appears likely to extend into this Christmas-holiday shortened week.

In the previous five sessions, the Dow Jones Industrial Average jumped 3 percent, the Standard & Poor's 500 Index rallied 2.4 percent and the Nasdaq Composite Index advanced 2.6 percent.

Both the Dow and the S&P 500 closed at record highs on Friday, also helped by the latest upward revision of US third-quarter growth which underlined the Fed's confidence to start easing its monthly pace of bond-buying to US$75 billion in January, from US$85 billion.

American GDP grew at a 4.1 percent annualised rate in the three months ended September, up from a previous estimate of 3.6 percent, and accelerating from 2.5 percent in the second quarter.

Investors now expect a gradual phasing out of the Fed's bond-buying program though realise that tapering does not mean the end of central bank stimulus which has bolstered the rally in equities, with the Dow up 27 percent in 2013 and the S&P 500 gaining 30 percent.

The FOMC will probably cut its bond purchases by US$10 billion in each of its next seven meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of 41 economists conducted on December 19. Interest rates are expected to stay near current historic lows through 2015.

The coming days will offer several clues on the economy including the Chicago Fed national activity index and consumer sentiment, both on Monday, followed by the FHFA house price Index, new home sales, durable goods orders, and the Richmond Fed manufacturing index, due on Tuesday, and weekly jobless claims, on Thursday.

US markets will close early on the 24th, at 1pm in New York, and are closed on the 25th for the Christmas holidays. Trading volumes are expected to be light until the New Year.

In Europe, the Stoxx 600 Index soared 3.7 percent last week. The UK's FTSE 100 climbed 2.6 percent, France's CAC 40 added 3.3 percent, while Germany's DAX gained 4.4 percent.

While Europe took its cues from Wall Street, there was positive news closer to home as well, with reports showing euro-zone manufacturing grew more than expected in December and German consumer confidence posting the biggest leap in six years.

"This year has been about fears not being realised," Steven Bell, a London-based fund manager at F&C Asset Management, told Bloomberg News. "It's another year the European economy hasn't fallen apart."

Even so, Standard & Poor's on Friday downgraded its credit rating on the European Union, replacing its top AAA long-term rating with an AA+.

"In our opinion, the overall creditworthiness of the now 28 European Union member states has declined," S&P said in a statement.

EU officials did not seem fazed, with Belgian Prime Minister Elio di Rupo saying "it's just an opinion," according to Reuters, while French President Francois Hollande said the downgrade "changes nothing," according to Bloomberg News.

Gold, which has tumbled 29 percent this year, rebounded on Friday from a three-year low but the outlook remains bleak for the precious metal.

"Downside risk still exists for gold as the Fed has only just started to taper ... and people have become very negative towards the metal because there is no sign of inflation," Bullman Asset Management manager Nick Bullman told Reuters.

Goldman Sachs expects bullion "to grind lower" throughout 2014, Jeffrey Currie, its head of commodities research in New York, told Bloomberg.

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