World week ahead: eyes on votes in Italy, Austria

The outcomes of Italy's referendum and Austrian presidential elections will help determine the mood at the start of a week during which the European Central Bank is expected to extend its asset purchase programme.

Also, US Federal Reserve officials William Dudley, Charles Evans, and James Bullard – scheduled to speak today at separate events – may offer fresh clues on the path of interest rates next year. Wall Street cooled near the end of last week but remains near record highs.

A Labour Department report last Friday showed that US non-farm payrolls rose by a better-than-expected 178,000 jobs in November while the unemployment rate unexpectedly fell to 4.6%, the lowest level since 2007.

While average hourly earnings fell last month, declining for the first time in almost a year, analysts predicted further gains ahead.

"This is likely to be a temporary setback, as further tightening in labour market conditions should increase competition for skilled labour and support stronger wage growth," Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan, told Reuters.

The report cemented already strong bets that the Fed policy makers will raise their key interest rate when they meet next week. Expectations that US President-elect Donald Trump will boost government spending, and therefore corporate profits, have bolstered equities as well as yields on US Treasuries since his November 8 election victory.

"There is much more than the Trump election driving the ... rally that started the day after the election," Bank of the West chief economist Scott Anderson wrote, according to Reuters. "We are seeing signs of a synchronised rebound in the global economy."

The latest US economic data will arrive this week in the form of reports on the PMI services index, ISM non-manufacturing index, the labour market conditions index, due today; international trade, productivity and costs, and factory orders, due Tuesday; JOLTS, due Wednesday; weekly jobless claims, due Thursday; as well as consumer sentiment and wholesale trade, due Friday.

For the week, the Standard & Poor's 500 Index shed 1%, while the tech-laden Nasdaq Composite Index dropped 2.7%. The Dow Jones Industrial Average managed to eke out a 0.1% gain. Techs were among the losers as investors rotated into stocks more sensitive to higher rates, particularly banks.

In Europe, the Stoxx 600 Index declined 0.4% on Friday.

Investors are awaiting the results of Italy's constitutional reform referendum, which takes place on Sunday, local time.

"We expect that under a 'Yes' vote the Italian equity market would have the potential to rally 5-10% in the short term, while a no vote might trigger a 5-10 percent correction should Matteo Renzi remain and 10-20% should the prime minister decide to resign," Reuters reported HSBC as saying in a note to clients.

Others beg to differ.

"I am less worried about the outcome of the Italian referendum as I think the risk is known, predictable and to some extent priced in," Barthelemy Debray, a fund manager at Cogefi Gestion in Paris, told Bloomberg. "I expect to see a rally led by a cyclical rotation by the year-end when all political events have passed."

In Austria's presidential election voters rejected the right-wing populist Norbert Hofer in favour of Greens-backed Alexander Van der Bellen, according to media reports. Hofer conceded defeat early Sunday evening. A victory by Freedom party candidate Hofer would have given western Europe its first far-right head of state since World War II.

Later in the week European Central Bank policy makers are set to gather and are expected to extend their asset purchase programme.

"Despite the relatively upbeat tone of recent data, on Thursday we expect the ECB to announce a six-month extension of its asset purchases at the current pace," Capital Economics said in a note.

(BusinessDesk)