World Week Ahead: Shift to neutral?

Investors are likely to be cautious ahead of this week's US Federal Reserve policy meeting, as well as the latest reports on the country's gross domestic product and jobs.

The Federal Open Market Committee begins a two-day meeting on July 29 and is expected to lower the pace of its monthly bond-buying, currently at US$35 billion, by another US$10 billion. Minutes of the June FOMC meeting showed policy makers plan to end the programme this year with a final US$15 billion cut after its October meeting.

Also closely scrutinised will be a report on US second-quarter economic performance, due on Wednesday. It's expected to show growth of 3.2 percent, according to Reuters. The world's largest economy shrank 2.9 percent in the first quarter because of an unusually severe winter.

At the end of the week, a government report may show employers added 230,000 jobs in July, according to a Bloomberg News survey. Last week a report showed that the latest weekly jobless claims dropped to the lowest level in eight years, underpinning the view that the US jobs market is gathering strength.

American Express, Mastercard, UPS, Merck and Pfizer are among companies scheduled to report quarterly earnings in the coming days. While so far a clear majority of companies have managed to meet or exceed expectations, there have been exceptions, notably Amazon and Visa.

"The earnings season overall has been in line (with analysts' estimates), but when companies with rich valuations disappoint, you're going to get crucified," Lawrence Glazer, managing partner at Mayflower Advisors in Boston, told Reuters. "Amazon and Visa are significant components of the overall market and bellwethers of their respective industries. That gives you pause."

Shares of Amazon plunged 9.7 percent on Friday after the online retailer reported a significantly wider-than-expected quarterly loss, even as sales grew, as it pours money into new businesses. That's beginning to wear a little thin.

"All of us understand making investments, and then there's a point where investors don't know what the payoff is," Michael Pachter, an analyst at Wedbush Securities in Los Angeles, told Bloomberg News. "What if they get to US$200 billion in revenue and still don't have profit?"

Shares of Visa sank 3.6 percent on Friday after the company downgraded its full-year revenue forecast.

"As expected, revenue growth was affected by a strong US dollar and tepid growth from cross-border transactions," Charlie Scharf, chief executive officer of Visa, said in a statement.

Wall Street dropped on Friday, pushing the Standard & Poor's 500 Index 0.5 percent down from its record close the previous day. The Dow Jones Industrial Average dropped 0.7 percent.

It didn't help that Goldman Sachs downgraded stocks.

"We downgrade to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities," according to the Goldman Sachs' portfolio strategy team led by Anders Nielsen. "This makes the near-term risk/ reward less attractive despite our strong conviction that equities are the best positioned asset class over 12 months, where we remain overweight."

Goldman expects equities to return 1.8 percent over the next three months; it predicts stocks will return 10.5 percent over the next 12 months.

For the week, the S&P 500 ended near where it started, edging 0.01 percent higher, while the Nasdaq Composite Index rose 0.4 percent; the Dow declined 0.8 percent.

In Europe, the Stoxx 600 Index added 0.7 percent last week, while the UK's FTSE 100 Index rose 0.6 percent.

US Treasuries ended last week with a gain after Friday's report on durable goods orders suggested the US economy might not accelerate as strongly as thought as companies remain careful with making investments. That sentiment might help as the Treasury is scheduled to auction US$108 billion in notes in the coming days.

"As the data has come in over the last couple of weeks, there will be a rebound, but not quite as strong as originally anticipated," Thomas Simons, a government-debt economist in New York at Jefferies, one of 22 primary dealers that trade with the Fed, told Bloomberg News. "The price action is reflective of these declining expectations."

(BusinessDesk)