World Week Ahead: Equity rally expected to renew

Monday 22nd February 2010

Equities in both Europe and the U.S. are expected to extend their rally this week though two keys events could determine the pace of the advance.

First, Federal Reserve chairman Ben Bernanke is scheduled to provide the US Congress with an update on the economy in his semi-annual testimony: he’s to provide it to the US House of Representatives Financial Services Committee on Wednesday and then the US Senate Banking Committee a day later.

The Fed’s unexpected decision to boost the discount rate last week has market watchers rethinking the interest rate outlook in the US, even though Fed officials continue to say that rates will remain “ultra” low for some time.

Investors are hoping to hear Bernanke’s thoughts on the strength of the US economic recovery and his perspective on whether the Fed may need to rein in inflation even if the jobless rate remains stubbornly high.

On Friday, William Dudley, president of the New York Fed, said growth needed to remain the top priority for policymakers. “Monetary policy is about the economy.”

A day earlier, three regional Fed officials said investors were incorrect in assuming that rates were poised to rise this year.

The second major market moving event might be the Euro-zone’s decision on what to do with Greece, and by implication, other members and their deficit woes.

A report in Der Speigel magazine on the weekend suggested that Germany’s finance ministry was proposing a euro-zone package of loans and guarantees worth as much as 25 billion euros for Greece.

Greece's deficit swelled to 12.7% of gross domestic product in 2009, way above the EU's cap of 3%, and Athens needs to sell some 53 billion euros of debt this year, including at least 20 billion euros in April and May, according to a Reuters report.

Last week, the Dow Jones Industrial Average rose 3%, the Standard & Poor’s 500 Index gained 3.1% and the tech-heavy Nasdaq Composite Index advanced 2.8%.

In Europe, the Dow Jones Stoxx 600 rose 3.9% last week.

Earnings in both the US and Europe have exceeded analysts’ expectations and that has been cited as the main reason why stocks have been rallying.

Of the 422 S&P 500 companies that have reported earnings as of Friday, 72% have beaten analyst expectations, 10% have matched estimates and 18% have missed estimates, according to Thomson Reuters data.

That is well above the 61% that have beaten estimates in a typical quarter since Thomson Reuters began tracking data in 1994, Reuters said.

In the week ahead, more earnings results are expected. In the U.S., Home Depot, Target, Macy’s, Toll Brothers, Newmont Mining and Safeway are on deck.

In Europe, more banks are set to detail their finances hot on the heels of stellar results from Barclays and BNP Paribas: RBS, Lloyds Banking Group, Commerzbank, Credit Agricole and Natixis.

On the commodities front, oil surged to a five-week high near the $US80 mark on Friday amid strikes and renewed Iran-U.S. tensions.

Oil and other commodities also got a boost from gains in the US dollar, which has now risen close to 4% this year, recouping most of last year’s losses. As the greenback has appreciated, the euro has depreciated - and traders are betting for more of the same this week.

Businesswire.co.nz

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