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World week ahead: Setting the agenda

Monday 18th October 2010

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Ben Bernanke couldn’t have made it any clearer on Friday that the Federal Reserve is going to buy more Treasuries in a bid to renew the US economic recovery.

The question that remains unanswered is how much money will the Fed spend.

Some market watchers have pegged US$500 billion. If the Fed meets that expectation though, will that be enough to bolster sentiment, or does the Fed need to set a higher “as much as” amount that gives it a chance to get ahead of the market?

The Fed needs to be setting the agenda and while it wants to be as open as it can, yet as the Bank of Japan showed in September when intervening to check the yen’s appreciation, the element of surprise can coexist with transparency.

The prospect of further Fed easing helped stocks on Wall Street to their second straight weekly gain and would help underpin further gains. Buying Treasuries helps put more money into the market and pushes yields even lower, leaving investors looking for other investments.

Stocks are a solid alternative. The market has continued to move higher since the Standard & Poor’s 500 Index broke a resistance level at around 1,130 in the middle of September, Reuters reported. Some chartists are now looking at an upside target of 1,228.74, the 61.8% Fibonacci retracement from the 2007 high.

The S&P 500 climbed 1% last week, hitting a five-month high on October 13, while the Dow Jones Industrial Average gained 0.5%.

Better-than-expected earnings have helped to offset the rising worries about the foreclosure mess in the US, which could get uglier this week.

However, Google Inc led a rally in the tech sector on Friday after its latest results blew through analysts’ expectations. Apple Inc is set to report its results on Monday New York time, with IBM and Yahoo! also set to report in the next few days.

Of the 19 companies in the S&P 500 that reported results since October 8, 15 have surpassed estimates, according to data compiled by Bloomberg. Analysts surveyed by Bloomberg predict 23% growth in third-quarter profit from a year earlier for S&P 500 companies.

Other blue chips to report this week include Johnson & Johnson, Caterpillar, Nestle and GlaxoSmithKline.

Equities have been rallying elsewhere too.

In Europe, stocks rose for a second consecutive week with the Stoxx 600 Index advancing 1.4% to 265.83. That brought the climb so far this year 4.7% and the gain from its lowest level this year to 15%.

This week there will be a heightened focus on US financial firms with Citigroup, Bank of America and Wells Fargo reporting results.

The broad S&P financial sector is expected to show earnings of US$27.7 billion in the third quarter, a 71% increase over a year earlier, although third-quarter revenue growth is seen falling 6% to US$252.9 billion, according to Reuters.

As for the latest reading on the world’s biggest economy, there will be lots to interpret these next five days. There’s industrial output, housing starts, the Philly Fed and the Fed’s Beige book.

But it’s not just about the US even though it often seems that way. On Wednesday, China will release third-quarter GDP and industrial production data, minutes of the latest Bank of England policy meeting will be released and the new UK government will detail its austerity budget.

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