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World week ahead: Volatility set to return

Monday 4th October 2010

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September proved a far better bet for most investors than history has showed. The reality though is that last month’s advances came with lower than average trading volumes and that’s a concern looking ahead.

This week the focus on the US is two-fold: the start of the third quarter earnings season and the latest jobs report, scheduled for Friday.

"The psyche of investors is still fragile," Garey Aitken, Calgary-based chief investment officer at Bissett Investment Management, told Reuters.

"I don't think there's a lot of conviction on the part of investors that we're setting the stage for big sustained upswing."

Last week, the Dow Industrials Average fell 0.3%, the Standard & Poor’s 500 slipped 0.2% and the Nasdaq dropped 0.4%.

The S&P 500 also hit a key resistance level after it climbed as high as 1,150.30 before losing ground. That level is viewed as the top of a recent range after stocks surged during September.

The situation is similar in Europe after equities there last week posted their biggest weekly drop in three months amid continuing concerns about the strength of some euro-zone banks and sovereign debt ratings.

While China’s recent economic data has been welcoming, the fact remains that growth in the world’s biggest economy is depressed. Federal Reserve Chairman Ben Bernanke noted last week that the central bank was working to help bolster the jobs market, though employment gains were proving elusive.

The consensus forecast though is for yet another disappointing jobs report in September. The jobless rate may have risen to 9.7% last month from 9.6% in August.

Estimates of how many jobs were created last month remains wide. According to a Reuters poll of economists, there’s a potential for a gain of 106,000 jobs on the upside and a loss of 75,000 jobs on the downside.

When looking at companies, and excluding the government, Bloomberg says 77,000 workers found jobs last month, up marginally from 67,000 in August. Part of the latest increase is seen as companies preparing for the pending holiday season, in particular retailers.

The prospect of another round of quantitative easing by the Fed - to bolster the economy - continues to keep the US dollar in check and this week the greenback is expected to drift sideways at best.

That is providing an opportunity for the euro to extend a recent rally. The euro has surged 7% against the US dollar the past two weeks.

As for the yen, the prospect of more intervention by the Bank of Japan can’t be discounted. The central bank's policy board is leaning toward easing monetary policy at an October 4-5 meeting, but it is hardly a done deal, Reuters says.

The flight to gold and other commodities also is expected to extend for at least another week, a further sign of concerns about what lies ahead.

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