What may drive markets this week?

Inflation, hard-to-beat expectations and political stalemate provide a significant downward risk to market this week. (Quoted in the Weekend edition of the Financial Times)

Last week was dominated by disappointing manufacturing data from Europe and China, whilst markets shrugged off a less than impressive Budget. After such a substantial rally year to date, this correction is healthy.

Graph showing the correction in world equity markets over the past week (S&P 500 in white, Eurostoxx 600 in orange, FTSE 100 in yellow); put in context of the substantial upward move year to date. Source: Bloomberg

Graph showing the correction in world equity markets over the past week (S&P 500 in white, Eurostoxx 600 in orange, FTSE 100 in yellow); put in context of the substantial upward move year to date. Source: Bloomberg

This week, issues concerning Europe’s firepower, the US consumer and broader economic growth will determine the direction of markets. Inflation, hard-to-beat expectations and political stalemate provide a significant downward risk to market, although upward momentum could always drive them further.

As fuel price inflation dents sentiment in the US, the consumer may be squeezed and figures for income and spending may disappoint. Furthermore, the opportunity for upside surprises in durable goods orders and Q4 GDP growth is limited as forecasted figures are already high.

A two-day meeting of Europe’s finance ministers will be closely watched for signs of an expansion in the firepower of the rescue fund. The deadline to do so draws near and the pressure for progress grows. However, Germany remains staunchly against such a move and, even if achieved, the figure reached may still not be enough.

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4 comments

    1. Thanks Mark for the debate. DOW actually didn’t manage to test 13,500 and swiftly fell from 13,241. Money coming in from the sidelines (using falls as buying opportunities) dampened the downside but positive momentum was not generated. Durable goods disappointed, as did home sales… The US is certainly looking strong compared to the UK and Eurozone fighting recession, but there are still plenty of opportunities to stumble. Good luck trading.

  1. Hey. Pretty decent analysis. I’ll be watching. The main thing I am looking for is just a race to the bottom in currencies as governments strain to keep stocks going up. People are way too fixated on stocks. Its all about commodities right now, vis-a-vis liquid investments. But, it will probably work and stocks will probably inch higher, giving everyone warm fuzzies. Gold will go up more, though…

    1. Thanks David. Indeed repeated bouts of quantitative easing are not positive for retaining curency purchasing power. The interesting angle for commodities is the current trading pattern inline with risk appetites. With investors speculating in the markets as opposed to just commodity firms using them to hedge their exposures, the correlation with equities has increased. Therefore calls on stock and commodities moves aren’t as isolated from one another as many believe…
      (Note this is with respect to oil, metals etc as opposed to agriculture which can at times still trade inline with weather patterns).

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