Focus on earnings as Fed enters blackout period

October 23, 2017 09:36 AM

EUR lower ahead of Thursday’s ECB QE announcement; IBEX stumbles again as Madrid prepares to impose direct rule on Catalonia; yen slips as Abe secures supermajority.

U.S. futures are relatively flat ahead of the open on Monday, but the sentiment remains very positive as we head into a key week for corporate earnings.

With 185 S&P 500 companies due to report on the third quarter this week, earnings will naturally be a key factor when it comes to the sustainability of the stock market rally. Global risk appetite remains strong though and investors are becoming increasingly optimistic about the economic outlook. Add tailwinds such as U.S. tax reform into the mix and despite lingering geopolitical and political risks, the rally may have some way to go yet.

While the week is looking busy from an earnings perspective for the U.S., it's looking a little light when it comes to economic data. Durable goods orders and third-quarter GDP represents the most notable of the data releases this week while the Federal Reserve blackout period came into effect this weekend ahead of next week's meeting, meaning all will go quiet on that front.

The ECB will be the headline act this week, with the central bank apparently preparing to announce details of its bond-buying extension on Thursday. While the extension itself will come as no surprise, the size and duration of the extension will be of keen interest. With the extension largely priced in at this stage, it will be interesting to see whether we see much more upside in the euro which has already reached levels the ECB clearly deems to be uncomfortable in recent months.

The IBEX is underperforming its European peers once again on Monday as Madrid moves closer to imposing direct rule on Catalonia and leaders in the region discuss their next steps, having rejected the motion. The prolonged stand-off creates more uncertainty for businesses in the region, many of which have proposed moving headquarters out of Catalonia. Given the steps being taken by Madrid, it’s difficult to see a situation that doesn’t involve more unrest and altercations, at the very least.

The Japanese election over the weekend which saw Shinzo Abe’s Liberal Democratic Party retain its two-thirds supermajority in the lower houses of parliament has weighed on the yen and lifted the Nikkei 225 to its highest since 1996. The result has effectively given Abe a fresh mandate to continue with Abenomics which means more fiscal stimulus and a prolonged period of the ultra-loose monetary policy. This could continue to weigh on the yen, particularly as other central banks across the globe pursue tighter monetary policy.

About the Author

Craig Erlam is senior market analyst at OANDA who also writes for OANDA’s Market Pulse site, Marketpulse.com.