An interest rate decision by the US Federal Reserve as well as a massive week for US corporate earnings are set to dictate the pace on Wall Street, where sharemarket indices are trading at record high levels.
About 170 companies, or roughly one-third of the benchmark S&P 500 index, are scheduled to report this week, with Google parent Alphabet, Facebook, Amazon, Caterpillar, Ford, Boeing, McDonald’s and Coca-Cola among the heavyweights.
Second-quarter profit reports have been mixed so far, confirming a recent stretch of patchy US economic data. While some of the bank earnings topped expectations, loan activity and outlooks weren’t stellar. That also goes for the likes of IBM and General Electric, which disappointed last week.
Overall strong earnings
Still, earnings have been strong enough for analysts to bump up their expectations for S&P 500 earnings to grow 9.6 per cent year-over-year, above the 8 per cent rise projected at the start of the month.
“Based on reports so far, it seems likely that earnings will continue to pleasantly surprise, helping Wall Street hold or surpass recently record price levels,” said BetaShares Capital chief economist David Bassanese.
But the spotlight now shifts to the tech sector, which has been spearheading this year’s stunning rally on Wall Street.
While the S&P500 index has gained 10.4 per cent year-to-date, vastly outperforming the local ASX 200’s paltry 1 per cent rise, the tech-heavy Nasdaq has soared nearly 20 per cent, and on Friday ended a 10-day winning streak, its longest since 2015.
The Nasdaq’s rally has been led by some of the heavyweight stocks reporting this week, such as Alphabet, Amazon and Facebook, which have rallied 26 per cent, 37 per cent and 43 per cent respectively, driving their valuations to dizzying levels. Amazon, for example, is trading at a forward price-earnings ratio of 150 times, the PEs of the other two are more modest in the 30s.
No rate change expected
Outside of earnings, the key event for US and global investors this week is the US central bank, which holds its two-day rates meeting, with a statement to be released early Thursday morning AEST. No rate change is expected. There’s an outside chance that more detail will be announced on what the Fed plans to do with paring its balance sheet — though consensus remains on September as the key meeting for specifics.
“The Federal Reserve policy meeting is unlikely to rock the boat too much … though the Fed may well hint that the timing of planned balance sheet reductions will be announced at the next meeting in September,” Mr Bassanese said. “While markets seem prepared for such a hint, it might nonetheless provide some lift to the $US and bond yields.”
Bank of Montreal deputy chief economist Michael Gregory said there’s of some tweaks to the economic assessment, ones that would make the timing of the next policy steps more ‘hazy’ or uncertain, given that both recent spending and investment indicators have been weak.
“In recent weeks, chair (Janet) Yellen and other FOMC members have revealed escalating concerns over core inflation dynamics. Specifically, worries over the degree to which common factors (such has economic slack along with technology-enabled disruption and globalisation), and not just idiosyncratic ones (such as mobile phone plan pricing and prescription drug costs), might be driving inflation,” Mr Gregory said.
“While the weight of evidence still falls heavily on the idiosyncratic side, any noticeable downgrade to the economic assessment would suggest at least a little more evidential weight is being given to the systemic side in the Fed’s judgement,” Mr Gregory also said. “This creates a little more uncertainty about the timing of the next policy steps, and some ‘hazy’ days ahead.”
US politics also continues to rumble on in the background for markets, but investors will be keeping an eye on news coming out of Washington, in relation to the state of US health care and the Russia-linked scandal.
Slow start seen for ASX
In the wake of a relatively quiet session on Wall Street over the weekend, local investors are expected to focus on this week’s Australian consumer price data, due on Wednesday. ASX futures closed down 25 points over the weekend, reflecting lower prices for iron ore and oil.
On Friday, iron ore fell 1.3 per cent to $US67.14 a tonne amid generally positive sentiment for the steelmaking raw material. Chinese steel mills were willing to buy seaborne cargoes at $US60-65 per tonne cfr, but prices of above $US70 per tonne cfr made them hesitate, a trader in south China told Metal Bulletin.
Commodities overall were mixed over the weekend with gold and copper rising, and oil and aluminium falling.
The New York traded shares of BHP Billiton and Rio Tinto ended down, 1.1 per cent and 0.9 per cent respectively. That said, brokers retain their optimism on Australia’s two mining majors.
RBC Capital Markets said it continues to rate Rio Tinto as its top mining pick, adding it sees “a potential special dividend helping to drive a near-term rerating”. As for BHP, it has held onto a buy recommendation from UBS on the expectation that it will lift shareholder returns and generate strong free cash flow in fiscal 2018.
with Jens Meyer