In the markets: What to watch this week

A year ago the US Federal Reserve (Fed) forecast that it would hike interest rates four times during the course of 2016. As the year draws to a close we have yet to see a single hike.

That said, tighter monetary policy seems to be coming into the market as the European Central Bank (ECB) announced last week that it would reduce its monthly asset purchases from €80bn to €60bn as of April 2017, and would extend purchases to December next year as of March.  

Federal Funds Futures, a market derivative that prices in future interest rates, indicates that traders see a near 100% chance of the Fed raising interest rates by 25 basis points on Wednesday, and a 50% chance that rates will be raised by a further 25 basis points by June 2017.

Major US stock indexes climbed last week as US president-elect Donald Trump, who is a proponent of protectionist trade policies, adopted reflationary policies to boost manufacturing in the world’s most powerful nation.

The concern that this highlights, however, is the over-inflated prices of companies on Wall Street and how an interest rate hike might affect them down the line when debts payments become inflated.

The S&P 500, which is largely recognised as the most important index having common stock listed on the New York Stock Exchange or NASDAQ, is trading at a price-to-earnings ratio (P/E) of 20.5 compared to the 15.63 average.

As a result of a lot of overpriced stocks and higher interest rates many investors fear that over-indebted companies’ weaknesses will come to light in 2017.

Locally, Wednesday is the day to revisit the cost of inflation. October data surged higher than expected to 6.4% as cost of food and non-alcoholic beverages increased at a faster pace. Forecasts indicate that 6.5% can be expected.

Other economic announcements due this week:

Monday

• Japan Machine Orders
• China Foreign Direct Investment (FDI)

Tuesday

• China Industrial Production
• Great Britain Consumer Price Index (CPI)
• German ZEW Economic Sentiment

Wednesday

• SA Retail Sales
• Japan Tankan Large Manufacturing Index
• Great Britain Average Earnings Index

Thursday

• SA Producer Price Index (PPI)
• Switzerland Swiss National Bank Monetary Policy Assessment
• German Markit Manufacturing Purchasing Managers’ Index (PMI) Flash
• Great Britain Monetary Policy Summary
• US Inflation and Unemployment Claims

Friday

• EU Final CPI
• US Building Permits

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.