World week ahead: Bullish on equities

Monday 27th September 2010

Equity markets are set to start the week as the month of September has gone so far - on a high.

US stocks rose for a fourth week, bolstered by further gains on Friday after data and corporate results put further distance to the potential for a second recession. Demand for durable goods rebounded in August bolstering shares in companies ranging from Alcoa to Bank of America, while Nike posted profits that smashed analysts' estimates.

The news from Nike was music to the ears of bulls as the company pointed to growth in China as well as the US.

"Even in a global market that still has some potential for turbulence, we're seeing evidence that our growth is accelerating," Nike Chief Executive Mark Parker said on a conference call with analysts.

If the rally on Wall Street extends through this week, September would be the best month for the S&P 500 since at least March 2000, and the best September for stocks since 1939, according to Reuters' data.

"Sentiment has turned sharply higher over the past few weeks after very bearish readings last month," Michael Sheldon, chief market strategist at RDM Financial, in Westport, Connecticut, told Reuters.

And what's important to note is that the rally appears to be strengthening. The 2.1% advance in the S&P 500 on Friday was its biggest gain in three weeks.

The latest economic news is helping to tip the debate back in favour of a moderate growth story.

Commerce Department data showed that orders for goods such as computers and communications gear were 4.1% higher in August. Bookings excluding transportation equipment rose at twice the rate that economists had forecast, Bloomberg News reported.

"The durable goods report was strong, it supports the idea that companies are spending money, which is important for overall economic growth," Eric Mintz, who helps oversee US$3.3 billion at Eagle Asset Management in St. Petersburg, Florida, told Bloomberg.

Yet another bullish indicator was the 9.05% drop to 21.71 in the Chicago Board of Trade's Volatility Index.

Federal Reserve Chairman Ben Bernanke said on Friday that the US economy was recovering at a slower pace than policy makers wanted, but it wasn't all bleak.

"By buying mortgage-backed securities and Treasuries we did, I think, additionally stimulate the economy," Bernanke said after a speech at a Princeton University conference.

"We avoided what could have been a global meltdown," Bernanke said.

While Bernanke had little detailed to say about his impression of the current state of the world's biggest economy, he can be expected to be pressed for more specifics when he gives testimony to Congress on Thursday Washington time.

Before and after Bernanke speaks more data will be released.

There are two key US manufacturing reports, one from the Institute for Supply Management and the second from the ISM-Chicago, better known as the Chicago Purchasing Managers Index.

The Institute for Supply Management's manufacturing index probably dropped to 54.5 in September from 56.3 in August, according to a Reuters poll of economists.

In addition, the latest reading on consumer confidence is due on Tuesday, while the final figures on second-quarter gross domestic product will be released on Thursday.

While the US economy appears to be on a steadier path, the prospect of more easy money from the Fed has hammered the greenback and there may be more to come. On Friday the greenback slid against all its major counterparts amid demand for higher-yielding assets, declining 1.3% against the euro to US$1.3492.

On Friday, the euro hit its highest level against the greenback since April and its highest level against the yen since August. The Swiss franc touched a record high against the US currency and the Australian dollar reached the strongest level since July 2008.

"The worst of the risk aversion is behind us; the [US] dollar is on the back foot," Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, told Reuters.

"The euro is benefitting as a safety valve because you have [US] dollar weakness across the board and you've also got the policy makers in Japan trying to limit yen strength."

Investors drew confidence to pile into oil, helping it posted its biggest weekly jump in two months amid all the signs pointing to a more robust economic outlook.

On Friday, US crude for November delivery rose 1.7% to settle at US$76.49 a barrel. For the week, oil rose 3.84%.

On Friday, gold rose to another record while silver hit the highest level in three decades.

All in all, it would appear to be a great time to be betting long across a wide range of assets. A flood of initial public offerings this week in the US will provide a solid test of investors' resolve.

Businesswire.co.nz

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