World Week Ahead: Equities in holding pattern

Monday 15th May 2017

As Wall Street continues to hover near record highs, investors will eye speeches by several Federal Reserve officials this week for fresh clues on the timing and pace of further interest rate increases as well as a start date for paring its balance sheet.

Last Friday's reports on US retail sales and consumer prices both showed weaker-than-expected gains but still kept alive bets that the Fed might announce its second rate rise this year after its June meeting.

“The data that we got [last] week, the Fedspeak we got recently, suggests that the reversal of the Trump trade is slightly overdone from the Fed’s perspective,” Thomas Simons, an economist at Jefferies, told Bloomberg. “It seems like they’re trying to combat that a bit with more aggressively hawkish guidance.”

Even so, the US dollar weakened as the price data signalled that perhaps the Fed needn’t retreat too fast.

"The economy picked it up a notch from the slow start earlier this year, but the inflation fires are not burning brightly and this will likely keep the Fed on just a gradual pace for interest rate hikes later this year," Chris Rupkey, chief economist at MUFG Union Bank in New York, told Reuters.

The Fed’s Loretta Mester is scheduled set to speak on Thursday, followed by James Bullard on Friday.

Reports on the US economy slated for release in the coming days include the Empire State manufacturing survey, and housing market index, due today; housing starts, industrial production, and e-commerce retail sales, due Tuesday; as well as weekly jobless claims, Philadelphia Fed business outlook survey, leading indicators, due Thursday.

Last week, the Dow Jones Industrial Average slid 0.5 percent, while the Standard & Poor’s 500 Index fell 0.4 percent, and the Nasdaq Composite Index retreated 0.3 percent.

On Friday, the S&P 500 closed at 2,390.90.

“A continuous rejection of the 2,400 level has kept more substantial demand at bay,” Frank Cappelleri, a technical analyst at Nomura Instinet in New York, wrote in a note, Bloomberg reported. “The solution for this is any easy one: make new highs. Easy, yet challenging to actually accomplish.”

US Treasuries gained, sending the yield on the 10-year benchmark note 2 basis points lower for the week.

"Most of what you’ll find that is outright negative will have to do with sentiment," Marc Pado, president at DowBull.com in San Francisco, told Reuters. "People worried about the market on a technical basis are worried because there is too much complacency or optimism, but not on an indication that there is some kind of top."

While US corporate earnings overall have bolstered optimism about the outlook, retailers have clearly disappointed. Last Friday shares of JC Penney plummeted 14 percent and those of Nordstrom sank 10.8 percent after results from each of these department-store chains missed the mark. Shares of Kohl’s and Macy’s also closed lower on Friday, extending their respective Thursday plunges.

In Europe the Stoxx 600 Index added 0.3 percent on Friday. The index posted a gain for the week, bolstered by relief that French voters opted for centrist Emmanuel Macron as their next president, instead of far-right anti-euro nationalist Marine Le Pen.

“It seems that while political risk has subsided, investors remain far from convinced that further upside can be sustained without further evidence of a positive pickup in the economic numbers,” Michael Hewson, chief market analyst at CMC Markets in London, wrote in a note, Bloomberg reported.

Investors will watch reports on euro-zone gross domestic product, due Tuesday, and the region’s consumer price index, due Wednesday.

On Thursday, European Central Bank President Mario Draghi is set to speak in Tel Aviv, which will be closely eyed for any clues about monetary policy and the bank’s asset purchase program.

(BusinessDesk)

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