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Week in Focus

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Market continues to defy sceptics…

Mon, Oct 12 2009, 08:24 GMT
by RANsquawk Research Team

RANsquawk

The sceptics out there continue to repeat the message that stocks are overbought, market have gone up “too far, too fast” and so forth. However, not only the long-awaited pullback remains elusive, there are reasons to believe the rally is set to carry on in the near term.

The earnings season got off to an encouraging start last week after Alcoa reported better than expected bottom and top-line results. This saw the “bulls” on Wall Street wake up from their hiatus and in turn push the DJI to fresh 2009 highs by the end of the week. It seems that the key factor in judging the success of the upcoming earnings season will be confirmation of genuine revenue growth, as opposed to earnings surprises resulting mostly from cost-cutting measure. But some analysts point out that the rally has priced in the bulk of good news and as such it is unlikely that another sizeable rally is going to develop based purely on strong bottom and top-line results.

Also according to the latest American Association of Individual Investors' weekly survey, the percentage of bulls shrank by 9% points to 35%. However, one should also remember that the vast amount of sideline money has the potential not only to support any pullback but also propel stocks higher should the confidence in the market persist. To conclude, it is worth remembering a Roman legend, which states that when the Roman generals, while making their triumphal marches, were followed by a slave whispering - “remember, you are mortal.”

In Goldman Sachs we trust…

This week will see majority of the banking heavyweights releases their respective performance figures and markets will be watching closely whether the losses continue to rise from mortgages, credit cards and, increasingly so commercial real estate. The most recent development in the banking sector was an unexpected move by Goldman Sachs to raise the US large-cap bank sector to attractive from neutral. This was against the backdrop of rather negative comments from the likes of George Soros, who said that the US economic recovery will be extremely slow thanks to the “basically bankrupt” banking system at its core. It’s Goldman Sachs vs. the World…and Goldman is winning

Finally…

In terms of economic reports slated for this week, the highlight will be the release of the minutes from the latest rate setting meeting from the Fed. The minutes are expected to echo a positive, but still cautious, message from the Fed members. Elsewhere, US retail sales are expected to have fallen 2.1% in September, after a jump of 2.7% in August. The key factor behind the expected fall is a drop in auto sales, following the termination of government sponsored “cash for clunkers” program. Also, the preliminary reading of the University of Michigan consumer confidence index is forecasted to stay unchanged in October at 73.5. However, the latest NFP report showed that the levels of job losses accelerated in September and as such prompted some to speculate whether the report will fall short of market expectation.

In the UK, the CPI reading for the month of September is expected to rise 0.3% but the annual rate is forecasted to fall to 1.3%. The lower than expected reading will likely augment speculation that the BOE will choose to expend its QE efforts and in turn this should see a sell off in the GBP currency.

In Europe, the centre stage will be taken up by the ZEW survey which is forecasted to edge up to 58.8, the highest since April 2006. Elsewhere, the annual Euro-zone CPI is expected to fall 0.3%. However given that the ECB has stated on numerous occasions that it expect inflation rates to remain negative before returning to positive levels in coming months.

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Published on  Mon, Oct 12 2009, 08:27 GMT