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World Week Ahead: Equities shift into higher gear

Monday 26th April 2010

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Global equities rose on Friday after Greece waved a white flag and ahead of what’s expected to be still more solid earnings from US companies.  

The Greek government’s decision to ask to tap a bail-out package from the European Union and the International Monetary Fund - while a sign of how tough a situation Greece is in - eased some of the continuing concerns about what was going to happen.

The lingering worries about whether Greece’s euro zone partners would throw it a lifeline was one of the key reasons why the euro has been hammered this calendar year.

On Friday the euro rebounded, albeit in relative terms. The euro gained 0.6% against the US dollar and rose 1.1% versus the yen.

That set the stage for European stocks to rally, cutting the week’s losses for the Dow Stoxx 600 to a mere 0.2%.

Strategists remain bullish on equities, in particular because of signs that the world’s biggest economy appears to be moving from strength to strength.

On Friday, a report showed that new home sales in the U.S. soared 27% in March, the most since April 1963. That came after a report in Germany showed business confidence there was at a two-year high.

US stocks powered ahead on Friday, bolstered by Merck & Co and rising crude oil prices. The focus next week will continue to be heavily skewed toward earnings with reports due from 3M Co, Caterpillar, US Steel Corp, Texas Instruments, DuPont and Visa Inc.

Of the 172 S&P 500 companies that have already reported earnings for the quarter, some 83% have beaten analyst expectations, well above the 61% in a typical quarter and above the 79% record set in the third quarter of 2009, according to Thomson Reuters data.

Both the Dow Jones Industrial Average and the Standard & Poor’s 500 reached 19-month highs on Friday. The S&P 500 is up 80% since the March 2009 bottom, has spent the past week building a base in the 1200 area.

“The recovery is sustainable,” Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, who oversees US$55 billion told Bloomberg News. “Things are starting to fall into place in different areas of the economy. It’s telling us a pretty good story.”

In the week ahead, the Federal Reserve will hold its regularly scheduled policy meeting, though traders are betting there will be no news.

Futures trading on the CME Group Inc. exchange showed a 57% chance that the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by its November meeting, up from 43% odds a week ago, according to Bloomberg.

The Fed has kept its benchmark rate in a range of zero to 0.25% since December 2008.

Last week, the greenback recorded its first five-day rally in three weeks versus the yen, appreciating 2% on signs of U.S. economic strength and some speculation the Fed would opt to drain cash from the economy by selling assets.

CNBC, citing Fed sources that it didn’t identify, reported that a “growing bloc” of policy makers favour sales of assets, Bloomberg said. The central bank is due to release its statement on April 28.

Among the other stories to follow this week will be testimony from two key Goldman Sachs’ employees to a US Senate committee on the fraud charges being pursued by the Securities and Exchange Commission.

Chief Executive Lloyd Blankfein and Fabrice Tourre, the bond trader at the centre of the alleged fraud, will meet with the Senate Permanent Subcommittee on Investigations. Goldman has said it will fight the charges.

On the US economic front, there will be several key readings to assess the recovery. There’s a consumer sentiment report on Tuesday and on Friday, there will be the initial reading on GDP as well as a consumer confidence report.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell on Friday by 0.27% to 81.35.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 0.7% to 279.05.

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