FOREX.com | Feb 14, 2017 08:38
It was a strong start to the week for risky assets, as European stocks played catch up, the FTSE 250 in the UK reached a fresh record high, and US stocks extended gains after last week’s surge higher. But equity markets face a key test later today when the Fed’s Janet Yellen appears before the Senate Banking Panel, the first of two appearances on Capitol Hill this week.h3 Yellen checklist:/h3
Equity futures are pointing to a slightly weaker open for European and US markets today, as exuberance is reigned in ahead of Yellen’s testimony. While we expect the Fed chair to remain tight-lipped about the prospect of when the next rate hike is likely to happen (the market is currently pricing for another hike in June), there are a few important things to watch out for.
Overall, the market is looking for three things: is the Fed still thinking about three rate hikes this year? Has anything occurred that could de-rail this expectation? Will Yellen give the markets a reality check by voicing some scepticism about potential fiscal change under President Trump?
h3 Will US Inc. put its money where its mouth is?/h3Janet Yellen holds the key to the short-term direction of global risky assets; however, she also holds the key to the next longer-term move in US equity markets. Analysis by Bank of America found that a record 51% of executives described their outlook as “optimistic” during the recent earnings season, according to data that goes back to 2003. There are also signs that optimism at the board level is translating into greater investment spending; some measures of investment intentions for US companies are at their highest levels since 2001. After a stunning rally in US equities since November, the next leg higher in the equity market rally is dependent on the spending and investment plans at boardroom level.
h3 Janet Yellen’s Goldilocks problem/h3Prospects for interest rate increases this year could also impact corporate investment intensions. If Janet Yellen is too hawkish at this week’s Congressional testimonies then we could see corporates start to worry about the cost of capital. If she is too dovish then some might start to get jitters over the true health of the US economy. Thus, Yellen needs to get the tone just right – not too optimistic or too pessimistic – to help US stocks close higher for the sixth consecutive day.
h3 UK retailers on the line ahead of UK CPI data/h3Elsewhere, here is our UK CPI preview. Read our take on what an upside surprise could mean for the pound, and why it may be bad news for some of the UK’s largest domestic retailers such as Tesco (LON:TSCO) and M&S (LON:MKS).
The FTSE 100 was the weakest of the major European indices on Monday. It was led higher by the mining sector, including Glencore (LON:GLEN) and Rio Tinto (LON:RIO), other strong performers included Barclays (LON:BARC) and HSBC (LON:HSBA). UK banks and miners report earnings next week, it appears that good news is already being priced in. But, any weakness in these sectors later today could trigger a broader weakness for the FTSE 100 as we progress through this week.
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