World week ahead: Buffett's tax windfall, Powell to give first testimony

Traders on Wall Street expect stock and bond moves to be relatively quiet at the start of the week before Tuesday’s much-awaited first monetary policy update by new US Federal Reserve chairman Jerome Powell’s to the Congress.

This will be followed by further testimony to the Senate on Thursday.

The Fed held short-term interest rates steady in January but investors widely expect the central bank to raise rates following its March meeting. They are still trying to gauge whether that will be one of three or four increases this year.

“Investors are waiting for Powell and to hear his commentary on the likelihood of three versus four rate hikes this year,” said Justin Wiggs, managing director in equity trading at Stifel Nicolaus.

US stocks rallied on Friday to end a bumpy week with slight gains, as falling bond yields provided a reprieve for investors concerned about rising inflation.

Major indexes surged into the close, with all 11 sectors in the S&P 500 climbing higher. Companies that pay out hefty dividends, like utilities, led the way.

The Dow Jones Industrial Average climbed 347.51 points, or 1.4%, to 25309.99. The S&P 500 added 1.6% to 2747.30 and the Nasdaq Composite rose 1.8% to 7337.39.

After selloffs on Tuesday and Wednesday, the Dow ended the week up 0.4%, while the S&P 500 gained 0.6%.

Bond yields fall
The US 10-year Treasury yield fell slightly on Friday to 2.871% from 2.917% on Thursday, but has risen from 2.4% at the end of 2017.

Weekend news was dominated by the release of Warren Buffett’s annual letter to shareholders of Berkshire Hathaway.

It said the increase in the company’s net worth of $US65 billion was “real” but “a large portion of our gain did not come from anything we accomplished at Berkshire.”

Trump administration tax changes lowered Berkshire’s estimate of how much it would have to pay in taxes if it sold the stock investments it currently holds.

Berkshire has around $US100 billion in unrealised gains on equity investments, Those gains are expected to be taxed at a 21% rate, down from 35%.

The immediate net windfall of $US29 billion helped push Berkshire’s net earnings to $US44.94 billion in 2017 from $US24.07 billion for the previous year while offsetting declines in certain businesses.

Berkshire’s operating earnings fell 18%, from $US17.6 billion in 2016 to $US14.5 billion in 2017, as hurricanes and other catastrophes caused losses in the company’s insurance operations.

New market-affecting data due this week includes US new home sales for January, due on Monday, and China’s PMIs and Eurozone CPI on Wednesday. Eurozone and US ISMs/PMIs are due on Thursday.