World Week Ahead ECB rate decision awaited

Monday 4th November 2013

It's time for US Federal Reserve officials to step to the sidelines, at least for a few days, with policymakers in Australia, the UK and Europe set to give investors some new plays.

The key meeting is in Frankfurt on Thursday where the European Central Bank could decide to lower its key interest rate or opt to provide more cheap loans to the region's banks. President Mario Draghi's words will be monitored closely.

If the ECB does move to bolster liquidity, the euro is expected to extend the two-week low it hit on Friday.

In contrast, the US dollar advanced ahead of the weekend after the Institute of Supply Management said its top American manufacturing index rose to 56.4 in October with 14 of 18 sectors reporting growth.

The report was an unexpected positive amid concern the recent US federal government shutdown had crimped the expansion of the world's biggest economy.

"The past relationship between the PMI and the overall economy indicates that the average PMI for January through October (53.3 percent) corresponds to a 3.5 percent increase in real gross domestic product (GDP) on an annualised basis," Bradley Holcomb, chair of the ISM, said in a statement.

"In addition, if the PMI for October (56.4 percent) is annualised, it corresponds to a 4.4 percent increase in real GDP annually," Holcomb also said.

The factory data bolstered investor confidence on Friday. The Dow Jones industrial average gained 69.80 points, or 0.45 percent, to 15,615.55. The Standard & Poor's 500 Index added 5.10 points, or 0.29 percent, to finish at 1,761.64. The Nasdaq Composite Index edged 2.34 points, or 0.06 percent, higher to close at 3,922.04.

The reports "confirmed that maybe the economy isn't quite as weak or rolling over" as some expected, Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about US$58 billion in assets, told Reuters.

The positive tone to the market will be tested in the coming days with a slew of economic reports and the expected trading debut of Twitter. Analysts have been racing to peg target prices on shares on the messaging service even before the IPO price has been set.

The top economic report will come on Friday in the form of October's payrolls report - though the data may be skewed by the recent shutdown. Other reports ahead: factory orders, the ISM services index, third-quarter GDP and private jobs statistics as well as consumer sentiment.

Earnings also will be competing for headlines: Kellogg, Office Depot, Mosaic, Tesla, Time Warner, Molson Coors, CBS, Groupon and Walt Disney are scheduled to report this week.

It also will be a heavy week for European corporate results, which have been helping pace euro stocks higher. The Stoxx Europe 600 Index advanced 0.4 percent to 321.50 last week, extending its rally so far this year to 15 percent.

"With Europe moving out of a recession we're really in the moment of truth for earnings," Didier Duret, who oversees about US$222 billion as chief investment officer for ABN Amro Private Banking, told Bloomberg.

Among the earnings to watch for from Europe: HSBC, Credit Agricole, Commerzbank, Porsche, G4S, Reed Elsevier, Adidas, Lafarge and Alstom.

The focus clearly though will be on Draghi and what he persuades his fellow ECB board members to do. Bank of America, UBS and Royal Bank of Scotland are among those betting on a rate cut.

"The ECB has become unusually tolerant of low inflation, even by its own standards," Greg Fuzesi, an economist at JPMorgan in London, told Bloomberg. "The argument for inaction is becoming more stretched, however."

BusinessDesk.co.nz

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