Financial Markets Outlook

Posted by SM-INVEST -

Last Week’s Summary

U.S. stock markets moved higher after the government announced the trade talks officials planned. The discussions will take place in China next Monday for the first high-level trade talks in almost two months. U.S. investors also welcomed an agreement between the Congress and the White House to avert a debt ceiling crisis, reducing the odds of a government shutdown later this year.

U.S. gross domestic product growth for the second quarter came out stronger than expected. However, it is still slow enough to keep the Federal Reserve on track for an interest rate cut in the middle of the next week. Meanwhile, as reporting season for second-quarter earnings gathered steam, broad results pointed to slightly better than the expectations.

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The S&P 500 pushed to yet another all-times-high record to close at 3,025.86, led by the communication and technology sectors. Alphabet Inc. (Google), which comprises more than one quarter its sector’s index weight, surged more than 10% on Friday after its positive earnings report. Semiconductor makers rallied after Texas Instruments reported better-than-expected earnings results and issued higher guidance. Apple’s stocks saw a substantial gain in anticipation of its results due next week. Facebook also moved higher, in spite of negative regulatory headlines. Facebook agreed to pay a record $5 billion fine related to privacy violations, while the Department of Justice announced it will review possible anti-competitive behaviour of the market leaders in social media, search, and online retailing. More than 40% of S&P 500 companies have reported quarterly earnings for the second quarter. 76.4% of those companies have posted a better-than-expected profit.

In Europe, the ECB did not change the interest rates on Thursday. The president of the central bank, Mario Draghi, said that the economic outlook does not look good. A weak manufacturing sector and trade uncertainty with the Brexit contributes to it.

The Week Ahead on Financial Markets

This week the markets will be waiting for interest rate decisions from the U.S. Federal Reserve and the Bank of England, as well as the release of the latest U.S. non-farm payrolls report.

All investors’ eyes will be on the U.S. Federal on Wednesday as it makes its latest policy announcement. Most analysts expect just a precautionary 25 point rate cuts on Wednesday and everything except that will be a surprise for the markets. As far as the Bank of England rate announcement on Thursday there are no changes in sight. The Bank of Japan should also hold the rates unchanged when it publishes its decision on Tuesday but could reinforce its commitment to keep interest rates at the lowest levels.

On Tuesday, consumer confidence and pending home sales data will be public in the U.S. This set of data will show the investors the direction of the American economy. Better than expected readings could a positive indication for the USD.

Mid-week Market Action

On Wednesday, German unemployment change comes out. Better than expected data would be a positive indicator for EUR and for major German equity indices.

Later that day, the Eurozone Consumer Price Index will be released. The CPI data is a key indicator for the changes in purchasing trends and inflation. A higher than expected reading should be positive for the EUR against other currencies.

The highlight of the week is the Federal Reserve interest rate decision. Analysts expect the Fed to cut interest rates for the first time in more than a decade. This announcement of interest for investors worldwide. 

The German Manufacturing Purchasing Managers’ Index (PMI) will be released on Thursday. Traders watch these surveys closely as purchasing managers usually have early access to data about their own company’s performance, which can be a leading indicator of overall economic performance. A better than expected report is positive for the EUR and major German market indices. Later that day, the same PMI data will be released in the U.K. and a higher than expected reading are positive for the GBP. Bank of England will issue its interest rate decision, and the expectations are for the interest rates to stay unchanged.

Closing the Trading Week

On Friday, non-farm payrolls and the unemployment rate will be released. Higher than expected reading of the unemployment rate could harm major U.S indices and might cause weakness in USD. This data will come after the Fed meeting and will confirm whether a rate decision was necessary as investors try to overview the monetary policy outlook for the rest of the year.

Apart from many economic events, investors can look forward to what is another week of U.S. earnings. One hundred seventy companies listed on the S&P 500 are set to report results, including Apple, General Electric, General Motors and ExxonMobil.

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