While you were sleeping: US data releases to influence week ahead

Monday 12th October 2009

US stocks ended strongly last week with the Dow Jones Industrial Average Index above its previous 12 month high, following strong gains in metal stocks Alcoa, Newmont Mining, and Freeport-McMoRan as the third quarter earnings season got off to a healthy start.

The Dow Jones average rose 4% to 9864.94, accompanied by 4.5% increases in both the Standard & Poor's 500 Index to 1071.49, and the Nasdaq Composite Index to 2139.28, with all eyes on Dow heavyweights that are due to report this week. These include Google, Intel Corp, Johnson & Johnson, JPMorgan Chase, Goldman Sachs, IBM, Bank of America and General Electric.

With reported jobless claims also falling below analysts' expectations last week, US sentiment currently favours pricing in good news, although Reuters reports some analysts questioning whether current PE ratios, now sitting at their highest average levels since 2004, can justify much further upward movement.

That's particularly as third quarter profits are expected to show the ninth straight quarterly decline in profits before an anticipated rebound in the fourth quarter to end the longest downward run since the Great Depression.

Reflecting stronger economic sentiment is the Chicago Board of Trade's volatility or VIX Index, which plummeted almost 20% last week, its largely weekly fall since November. However, economists expect that September retail sales to show a decline following the rush in August on new cars before the federal "cash for clunkers" car replacement programme expired.

Alcoa's 11% rise to US$14.24, its highest level in a year, was the second day of improvement after the aluminium manufacturer reported earnings at US4 cents a share, instead of a widely anticipated loss of around US9 cents a share.

Meanwhile, a new record gold price of $1062.70 at the end of last week saw the largest gold producer in the US, Freeport-McMoRan jump 13% in Friday trading to US74.34, spurred by the Reserve Bank of Australia's unexpected move to raise interest rates, which pushed the US dollar down and raised gold prices.

Analysts are also watching for further slippage in consumer confidence this Thursdays's release of the monthly Reuters/University of Michigan preliminary index. of consumer confidence for October dipped from the highest level since January 2008.

In Europe, UK Prime Minister Prime Minister Gordon Brown is expected to kick off the week with plans for 3 billion Pounds in privatisations to stem the country's looming fiscal deficit after a week of strong gains for European stocks.

The Dow Jones Stoxx 600 rose 3.7% to 242.73, with improvements in all 19 industry groups covered in the index, and BHP-Billiton enjoying the global surge in mining stocks.

But grim news from Russia over the weekend may temper European sentiment. Prime Minister Dimitry Medvedev warned that the Russian economy was more vulnerable to the financial crisis than expected and could shrink by a "very serious" 7.5%, more than twice earlier forecasts.

"I must admit that we sunk below our lowest expectations," Medvedev said in a television interview, reported by Bloomberg. "The real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organizations."

Russia needed 15 years to become a modern economy, free from its dependence on volatile energy exports, he said.

The UK pound remained weak despite rising signs of inflation, on speculation the UK economy is too weak to allow a rise in official interest rates yet.

The outlook in the week ahead for the US dollar, which touched 14 month lows last week, is mixed and likely to be influenced by Wednesday's release of cross-border merchandise trade prices for September, business inventories for August, retail sales for September, and the minutes of the Federal Reserve's September policy meeting.

Businesswire.co.nz

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