World Week Ahead: Momentum intact

Monday 8th November 2010

US stocks are expected to extended their rally, amid signs that the US recovery is gathering steam and with the knowledge that the Federal Reserve is ready to further bolster growth.

Equities on Wall Street last week had their fifth straight week of gains, inspiring the Standard & Poor’s 500 Index 3.6% higher. The Stoxx Europe 600 Index gained 2.3% last week, the largest advance in two months and ahead of a barrage of earnings reports, notably in the UK.

"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," Bill Luby, a private investor in San Francisco, who writes the VIX and More blog, told Reuters.

A correction might still occur, though. A number of indicators suggest the market is in position to consolidate.

The 14-day relative strength index is at 88.5. A reading above 70 usually indicates an overbought condition. However, some analysts say the indicator for an overbought market expands in a bull market. So this level may not necessarily be a bearish indicator.

The S&P 500 has surged almost 20% since July 2 and the Dow erased all its losses that followed Lehman’s 2008 bankruptcy.

In a technical barrier, the 61.8% retracement of the slide in the S&P 500 from the historic highs in 2007 to the lows in March 2009 is 1,228.74, near Friday's session high of 1,227.08.

Last week’s US elections, Fed decision and jobs report “have positive forward implications for equity prices,” Barry Knapp, chief US equity strategist at Barclays Plc in New York, told Bloomberg.

Last week the yield on the US 5-year note dropped eight basis points to 1.09%, according to BGCantor Market Data after the Federal Reserve said it would purchase an additional US$600 billion of US debt with a focus on the mid-term market.

This week there’s a focus on the US trade deficit, which probably narrowed in September as a weaker dollar boosted US exports economists said before the Commerce Department reports on November 10.

The gap shrank to US$45 billion from US$46.3 billion the prior month, according to the median of 57 estimates in a Bloomberg News survey.

Another report might indicate consumer confidence strengthened in November.

Meanwhile the greenback might be near a low against the euro as Friday’s jobs data far exceeded expectations and bolstered confidence in the US economy.

Against high-yielding and emerging market currencies the US currency’s struggle may continue.

"We're having indications that the economy is turning in the right direction. The US is regaining some traction," Thomas Kressin, senior vice president and lead portfolio manager of Pimco's Global Investor Series FX Strategy Fund in Munich, Germany, told Reuters.

Gold's record-breaking climb should continue for at least six months, corresponding to the planned duration of the Federal Reserve's monetary stimulus, according to a Reuters poll conducted on Thursday and Friday.

Thirteen of the 20 analysts, traders and fund managers polled by Reuters said the price of bullion will remain in an uptrend well into the first half of 2011, after the Fed’s announcement of a new round of quantitative easing.

Spot gold reached a record high of US$1,397.80 an ounce on Friday.

Businesswire.co.nz

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