- US earnings key on Tuesday;
- EUR edges higher on strong PMI data;
- EUR gains appear capped ahead of ECB decision.
A rare negative session on Monday in US equity markets could be quickly reversed on Tuesday, with futures pointing to a more positive open on Wall Street.
While there is always the potential for market pullbacks or even corrections, I don’t think we can read too much into Monday’s declines, especially given the long and gradual rally that preceded it and the size of the losses registered. I think what we saw Monday was simply some profit taking and now we’ll see just how bullish investors are at the moment by how quickly and aggressively the dips are seized on. Index futures suggest we won’t have to wait very long at all.
As will remain the case for much of the week, the main driver for equity market sentiment will be company earnings today with 42 S&P 500 companies scheduled to report on the third quarter. This includes the likes of Caterpillar, 3M, United Technologies and McDonald’s, all of which are also components of the Dow and three of which will report before the open, which could drive sentiment early in the session. We’ll also get flash services and manufacturing PMI surveys from the US shortly after the open which could help guide sentiment.
The eurozone recovery is gathering momentum according to surveys released this morning, with employment being a particular highlight from the manufacturing and services PMI reports. While the services PMI eased slightly from last month to 54.9 – which still indicates a strong growth outlook – the manufacturing survey was extremely encouraging and was driven by strong export demand.
While a stronger euro may represent a potential headwind for manufacturing going forward, the ECB is managing the transition very carefully and has repeatedly acted to prevent a damaging appreciation. The ECB is due to meet on Thursday, after which an update should lay out plans for bond buying beyond the end of this year when the current program will expire. While a reduction appears all-but guaranteed, the manner of the scaling down of QE is still apparently being decided on, with an initial €30 billion reduction until next September the most heavily speculation option.
The ECB will likely avoid to committing to anything beyond September – making this tapering process different to that carried out by the Federal Reserve – instead giving the impression that the decision will be made closer to the time, even if the process has already largely been agreed on. With this in mind, it’s hard to envisage a scenario in which the ECB intentionally delivers above what markets are expecting, which could weigh on the euro driven by either profit taking or the usual dovish accompanying commentary.
