Global Markets Face A Hectic Week

Global markets move into a hectic week. Traders are still absorbing last week’s actions, ranging from the ECB press conference and the unexpected rate decrease by the Peoples Bank of China. Monday morning Asian markets are expected to continue their reaction to the Friday’s strength in Wall Street before market focus shifts to Apple’s earning on Tuesday and the Federal Reserve decision on Wednesday.

Apple is scheduled to report fourth-quarter earnings after the market’s close on Tuesday. The fourth quarter is typically it’s second-weakest of the year, as it comes just ahead of the busy holiday season. Analysts expect Apple to report earnings per share of $1.87, up from $1.42 in the year-earlier period. Apple has surpassed the consensus in the last 11 consecutive fiscal quarters.

The big question this week of course is what the Federal Reserve will do or say in its statement Wednesday. The October meeting is usually a non-event and this could continue although it will attract more attention than normal. Book makers are putting the odds at just 8% in favor of no action. At its September meeting, the U.S. Federal Reserve Board decided to hold off on raising interest rates for now. For starters, it prolongs the uncertainty about when the Fed would make its move that has been overhanging the markets. A few weeks ago, it was widely expected to come in September. Now an increase is not likely to happen before mid-December and may even be postponed until 2016.

The delay reinforces growing concerns that the global economy, which has never really recovered from the Great Recession, is losing momentum. The day before the announcement, the Paris-based Organization for Economic Co-operation and Development (OECD) released a new forecast for world GDP growth in 2015 and 2016, and it wasn’t pretty. The OECD shaved a tenth of a percentage point off its global prediction for this year and two-tenths off next year. Canada fared especially badly. This past week the IMF downgraded its global growth forecast in its latest world economic outlook (WEO) update, pointing to weakness in the emerging market economies.

It appears that one of the factors that stayed the Fed’s hand was unease about the impact of a rate hike on the already too strong U.S. dollar. Driving the greenback higher at this stage is not good for anyone. It raises the cost of U.S. exports and reduces the profitability of multi-national companies, whose overseas sales are worth less in U.S. dollar terms. Developing countries are also hurt by a high dollar because the prices of the commodities they import, including oil, are fixed in U.S. currency.

The Fed also indicated that when the tightening does come, it will likely be more gradual than expected. I for one expected an increase in September and still expect a small increase this week, but I am part of a very small group. No one can ever predict what the Fed will do when. The problem facing the Fed now is a game of strategy. There isn’t a winner and a loser but each action affects the nets reaction. Now that Mario Draghi has almost promised the markets additional stimulus in December, what would happen if the Feds waited until December and countered the ECB stimulus with a rate increase?

The possibility of more ECB stimulus might hurt the U.S. economy by pushing up the value of the dollar. But the effect may be more than offset by other effects of the announcement, such as lower U.S. market interest rates and gains in U.S. stock market prices.

The Bank of Japan is also considering an expansion of its stimulus efforts, after the economy shrank in the second quarter and might have slipped back into recession. The Bank of Japan meets on Friday, October 30^th. Six of 13 economists in a Reuter’s poll said the BoJ will add to its stimulus when it meets on Friday, with inflation forecast to be just 0.1 percent in the fiscal year to March 2016. This move will send the Japanese yen tumbling.

US economic data due on Thursday, a day after the Fed’s statement, are likely to show U.S. economic growth slowed to an annualized 1.7 percent in the third quarter, according to a poll of economists down from 3.9 percent in the second quarter as a weaker global economy took its toll. Assuming the U.S. Congress strikes another last-minute deal before a Nov. 3 deadline to avoid defaulting on its debt, growth in the United States is expected to pick up toward the end of the year and remain strong in 2016.