US markets are on tender hooks going into the week that will likely see the end of the third round of quantitative easing, the Federal Reserve’s stimulus program that has been propping up markets for over two years.
Major US stock indices look like making a lower open after generally well-received ECB stress test results were undone by another monthly decline in German business sentiment which underscored the continued risk to US corporations from economic weakness in Europe.
The end of QE has been well telegraphed, it will be any change to the Fed’s statement especially the inclusion of a “considerable period of time” in reference to the first rate hike that is closely monitored. The Fed have been airing on the side of caution all along so it seems more than likely they won’t want to doubly rock the boat with both the end of QE and a change in the statement, especially in the light of the recent moderation in inflation.
Despite the difficulties in Europe, it will be the combination of US corporate earnings and the Fed which will determine market direction over next few weeks for US stocks. If a rate hike looks like a long way off and earnings hold up; we could be looking at new highs in the S&P 500. As long as the Fed maintain low interest rates it’s hard to see a full-on bear market. If earnings disappoint, the correction in stocks could extend to 15-20% from the highs.
From a US investment perspective; poor growth and disinflation in Europe only matters if it substantially impacts US corporate earnings. So far there has been some evidence of a European drag on earnings; Eli Lilly and Company (NYSE:LLY) and Ford Motor Company (NYSE:F) were notable example of companies specifically referencing European weakness. By the end of this week and especially by the end of the next, a much better picture can be formed on the extent of the drag from Europe on earnings.
Earnings before today’s open come from Allergan Inc (NYSE:AGN) and Merck & Company Inc (NYSE:MRK).
After the closing bell there are earnings from Twitter Inc (NYSE:TWTR), Amgen Inc (NASDAQ:AMGN) and T-Mobile US Inc (NYSE:TMUS).
Pending home sales, released at 2pm GMT are expected to have grown by 0.5% in September, an improvement from the 1% decline in August.
Futures suggest the:
S&P 500 will open 4 points lower at 1,960 with the
Dow 30 expected to open 21 points lower at 16,784 and the
NASDAQ Composite 6 points lower at 4,036.
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