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Week in Focus

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US economy returns to growth…

Mon, Oct 26 2009, 09:36 GMT
by RANsquawk Research Team

RANsquawk

The end is nigh…

The latest set of earnings results had little impact on the equity markets last week which raised questions whether the gravity defying rally in equity markets from March lows is finally petering out. More than 80% of companies have either met or surpassed Wall Street estimates and this in theory should promote bullish sentiment across the board. However the “bears” were quick to point out that earnings forecasts were slashed earlier this year when the idea of doom and gloom was still fresh in everyone’s mind. Besides that, one cannot derive a clear picture on company’s performance by looking at comparable Q3 2008 since the downturn was in full motion back then. The fact remains that corporate America is still struggling to reignite itself and it looks as though that upside momentum in stocks is unlikely until companies begin to raise their forecasts and show willingness of hiring again.

The negative correlation between the bond market and equities, or the lack of it during the recovery rally in stocks is beginning to trouble some investors. As such, there are mounting concerns that the there will be a sharp correction in equity indices once the government stimulus expires and the central bankers begin to remove the unconventional measures which were put in place to fight the recession. Also, it is seen that the policy makers will err to the side of caution and leave policy stimulus for too long rather than withdrawing it too early, giving rise to yet another asset bubble.

Oil rush

The consensus at the moment is that the V-shaped recovery is largely dependent on the pickup in the labour market. However, there is another key factor which is being overlooked by the majority and that is sharp rise in oil prices this year. The price of crude has risen 100% over 2009 and it remains to be seen what effect it will have on the recovery that depends mostly on the stimulus measures from the government.

US economy returns to growth…

The stimuli, as well as other measures taken by the Fed and the US government is finally bearing fruit with the market hoping that the US economy has finally turned a corner in Q3 2009. Though the question one should ask is what happens once the stimulus is withdrawn and the Fed is forced to tighten it monetary policy…

Economic events this week

The economic data is back on the agenda this week and as well as the Q3 earnings, market participant will get a chance to scrutinise reports on consumer confidence, housing data and the all important US GDP.

In the US, the latest economic indicators on consumer confidence suggest that this week conference board survey may disappoint and post a decline. However, current consensus is for a marginal improvement to 53.5 from 53.1. In the EU, the inflation rate will likely remain in negative territory however expect little objection from the ECB members since it was acknowledged that temporary negative inflation was expected. Also, the bank lending survey from the ECB is likely to be examined for potential hints on exiting of unconventional measures.

A combination of economic data, as well as another round of earnings which are set to continue to point to an economic recovery means that the downside price action will govern the fixed income markets this week. Also, the supply theme is likely to aid the downward move with a record USD 123bln of Treasury issuance this week. Elsewhere, the negative USD sentiment suggests that upward trend in EUR/USD is to stay for some time. Also, the GDP figures are expected to show strong growth for the US economy over the Q3 and as such the renewed optimism in the market is set to put the Greenback under additional pressure. However risk aversion trade could still materialise should the economic data and the earnings disappoint.

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Published on  Mon, Oct 26 2009, 11:15 GMT