S&P 500 Continues to Set Record Highs

Weekly Report - 16/10/2017

Investors Eye Profit Growth to Justify Equity Valuation Rally


Upbeat US economic data powered the S&P 500 to a fifth straight week of gains, with the index hitting a fresh all-time high on Friday as Wall Street banks kicked off the third-quarter earnings season. With stock valuations significantly above historical averages, market gains, if any, are likely to be driven by a rise in corporate profits.

Last Week

Headlines from Washington remained in focus last week after President Donald Trump signed an executive order to end subsidy payments to insurance firms that provide “Obamacare” health plans. On the economic front, US retail sales rebounded sharply in September, rising by 1.60% following a -0.20% drop in August. Higher gas prices in the wake of Hurricane Harvey were the major contributor, with the surge contributing to a 0.50% jump in the Consumer Price Index for September, the biggest increase in eight months. Stripping out energy and food, prices gained a more muted 0.10% last month. In geopolitical news, the Catalan push for separation from Spain remained in the headlines, with investors heaving a sigh of relief and sending the Euro to a two-week high against the US dollar after Catalan President Carles Puigdemont deferred an immediate declaration of independence. European equities received a boost from solid industrial production figures for the Euro Zone, particularly Germany, where the benchmark DAX 30 broke above the 13,000-ceiling for the first time in its 30-year history.  In the UK, the latest round of Brexit negotiations ended with Prime Minister Theresa May’s hopes for a transition deal before the year-end looking increasingly unlikely. Meanwhile, tensions between the US and North Korea remained escalated while a diplomatic stand-off between the US and Turkey got uglier.


The Week Ahead

The spotlight in the upcoming week will be on the Chinese Communist Party’s 19th National Congress, with investors scanning the twice-a-decade event for announcements that could set the country’s economic and political tone over the next few years. A batch of Chinese data, including third quarter GDP, should also offer insight as to recent growth and inflationary trends. The current consensus is for an annualized expansionary rate of 6.80% during the quarter. Elsewhere in Asia, a Japanese general election is scheduled for Sunday, October 22nd. Recent opinion polls suggest that Prime Minister Shinzo Abe’s ruling coalition is well on course to win a two-thirds majority. However, a strong performance by the opposition could ignite expectations of premature monetary policy tightening. In the UK, data on inflation, retail sales, employment and wages should help gauge whether the Bank of England will increase interest rates as early as November. Across the Atlantic, US industrial production figures are due on Tuesday before September’s residential real estate data with housing starts on Wednesday and existing home sales on Friday. It is important to note that the impact of hurricanes Harvey and Irma could distort the aforementioned economic releases. Canada will see the release of inflation and retail sales data on Friday, ahead of the Bank of Canada’s rate-setting meet next week.



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