World Week Ahead: All eyes on US elections

Monday 5th November 2012

All eyes are on the US presidential elections on Tuesday and investors may prove hesitant to make fresh bets until the results are in.

One of the latest polls showed that President Barack Obama is slightly ahead of Mitt Romney in Ohio and Florida, viewed by many strategists as the two most important swing states. The NBC News/Wall Street Journal/Marist College survey of likely voters put Obama ahead of Romney in Ohio, 51 percent to 45 percent, and in Florida, 49 percent to 47 percent, according to Bloomberg News.

Obama appears to be receiving a lift from his managing of the crisis in the wake of Hurricane Sandy as well as encouraging economic signs.

"The market might like the fact of an Obama win since it would mean less uncertainty," Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, in Cincinnati, told Reuters.

Trading on Wall Street was limited to three days last week-stock markets were closed on Monday and Tuesday-as Hurricane Sandy caused an estimated US$50 billion of damage to the East Coast of the US. New York City in particular was hit hard with transportation and the power grid suffering significant damage. In addition, almost half of the people killed as a result of the superstorm died in the New York City area.

Amid low volume and a focus on the storm, markets were mostly muted the final three days of last week: the Standard & Poor's 500 Index gained 0.2 percent; the Dow Jones Industrial Average fell 0.1 percent; and the Nasdaq Composite Index shed 0.2 percent.

There were notable and individual exceptions among companies including Starbucks which lifted its profit forecast for the fiscal year and whose shares surged 9 percent on Friday.

The latest clues on the state of the world's largest economy will come in the form of the ISM Non-Manufacturing Index and reports on international trade and weekly jobless claims in the days ahead.

Last week, data provided much-needed relief with better-than-expected numbers on consumer confidence and manufacturing. Most importantly October's jobs report-released on Friday-was stronger than anticipated and bolstered hope that progress is being made after all in the struggling labour market. US employers added 171,000 jobs in October and more people resumed looking for work, which pushed the jobless rate slightly higher to 7.9 percent.

The US Treasury is scheduled to sell US$72 billion in notes and bonds this week, according to Bloomberg. The appetite for US government debt remains strong as the economic impact of Sandy raised fresh concerns about the recovery. A Reuters poll of economists predicted that Sandy will knock 0.2 percentage points off of fourth-quarter gross domestic product.

US bonds also are being lifted by the lingering EU crisis. Europe's feeble finances may take five years or more to resolve, German Chancellor Angela Merkel told some of her own party officials on Saturday.

Looking beyond the elections, the outlook for US corporate earnings continues to weigh on Wall Street. Of the 378 companies in the S&P 500 that have reported earnings so far, 61.9 percent have exceeded forecasts, in line with the 62 percent quarterly average since 1994, according to Thomson Reuters data through Friday.

However, just 38.2 percent of companies having reported better-than-expected revenue, compared with the 62 percent quarterly average since 2002 and the 55 percent average over the past four quarters.

Companies set to report this week include Groupon, Time Warner Cable and News Corp.

In Europe, the Stoxx 600 Index increased 1.6 percent last week lifted by some strong results from a range of companies including Deutsche Bank as well as a plan by UBS to slash 10,000 jobs as it refocuses its business.

Not to be forgotten, policy makers at the European Central Bank and the Bank of England meet later this week. BOE officials will decide whether to extend the bank's asset-purchase program after the UK economy grew in the third quarter.

The nine-member Monetary Policy Committee will probably leave the target for asset purchases at 375 billion pounds (US$602 billion), according to 35 of 45 economists in a Bloomberg News survey. Seven forecast a 50 billion-pound increase in quantitative easing, and three expect a 25 billion-pound expansion.

The latest data on China-with reports on retail sales, industrial production, and the consumer price index due this week-will also be closely watched for further clues that the slowdown in the pace of expansion of the world's second-largest economy is less than initially feared.

A report on the weekend showed that China's non-manufacturing sector rebounded in October. The timing is good as it comes days ahead of the once-in-a-decade leadership change at the top of the Communist Party set for November 8.

BusinessDesk.co.nz

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