World Week Ahead: Data key to rally

Wall Street is at record highs, backed by the US Federal Reserve's ongoing commitment to providing easy money to help accelerate the economic recovery, and investors will be looking to a flurry of fresh data to provide further impetus.

Today, investors will eye the release of the latest China manufacturing purchasing managers' index to gauge if the world's second largest economy is showing signs of stabilising.

Closer to home, the coming days will bring the latest data on the US housing industry, a question mark in what otherwise looks like a sustained recovery. A report on existing home sales is due today, followed by the FHFA house price index, the S&P Case-Shiller home price indices, and new home sales on Tuesday.

"The recovery in the housing sector remained slow," Fed Chair Janet Yellen said last week, pointing specifically to a hesitancy among banks to approve mortgages to homeowners with less than "pristine credit."

Last week, the Dow Jones Industrial Average gained 1 percent to close at a record high 16,947.08, the Standard & Poor's 500 Index added 1.4 percent to end at an all-time closing high of 1,962.87, and the Nasdaq Composite index rose 1.3 percent.

A key reason for the rally is that while the US economy is continuing to improve, the slow pace means that the outlook for interest rates remains very favourable.

The VIX, a gauge of US stock volatility, fell 11 percent last week.

"What (we) have is a sweet combination of a self-sustaining, long-lasting economic expansion joined with a long-lasting monetary accommodation," Steven Einhorn, vice chairman of hedge fund Omega Advisors, told Reuters.

Other clues on the US economy will arrive in the form of the Chicago Fed national activity index, and PMI preliminary manufacturing index, due today; consumer confidence and the Richmond Fed manufacturing index, due Tuesday; durable goods orders, the final reading of first-quarter gross domestic product, and PMI preliminary services, due Wednesday; weekly jobless claims and the Kansas City Fed manufacturing index, due Thursday; and consumer sentiment on Friday.

As for fixed-income investors, they have begun worrying about inflation and they are far less comfortable than Yellen is about the outlook. The recent surge in oil prices, and the potential for even higher prices with Iraq's increasingly volatile situation, adds to that concern.

"Just as oil prices had become increasingly stable, we reckon the risk for an oil price spike is now the highest since the global crisis," Christian Keller, an economist at Barclays, told Reuters. "We think a further price spike of 10 to 15 percent from here is not implausible."

Into this rising risk environment, the US Treasury will sell US$30 billion of two-year notes, on Tuesday; US$35 billion of five-year securities the next day, as well US$13 billion of two-year floating-rate notes; and US$29 billion of seven-year debt, on Thursday, according to Bloomberg.

In Europe, the Stoxx 600 advanced 0.3 percent last week. The FTSE 100 Index climbed 0.7 percent, inspired by a US$46.5 billion takeover bid for specialty drug maker Shire from AbbVie. Shire rejected the offer, saying it was too low.

"I expect that M&A activity in Europe will go on till the end of the year," Herbert Perus, head of equit ies at Raiffeisen Capital Management in Vienna, told Bloomberg News. "A lot of companies are sitting on a pile of cash. Some US companies will get a tax advantage by buying European companies, so I expect cross-border deals to continue."

Euro-zone manufacturing PMI, due Monday; German Ifo, due Tuesday; German consumer sentiment, due Wednesday; euro-zone confidence, and Germany's consumer price index, due Friday.

(BusinessDesk)