This Week: U.S. Earnings, ECB meeting, Chinese GDP and final presidential debate

Written by Hussein Sayed, Chief Market Strategist at FXTM

Asian shares reversed early gains on Monday while the greenback held steady at its highest levels in seven months in what seemed to be a slow start for a busy week.

U.S. equities received a boost on Friday after three major banks reported earnings that beat Wall Street estimates, offsetting a profit miss from Alcoa that rattled markets earlier in the week, but concerns over central banks policies, global growth prospects, Brexit aftermath, and U.S. elections kept investors on guard. This week those concerns will be elevated leading to more volatility in financial markets as investors try to navigate through these complexities.

81 S&P 500 companies to announce earnings

So far 76% of the 34 companies that reported earnings managed to beat profit expectations and if this trend continues we’re very likely to see corporate America ending five consecutive quarters of profit recession. This might sound optimistic and probably provide a leg higher to stocks as doubts over high current valuations will be less of a concern, but Q4 earning guidance should be the key on whether to reconsider these thoughts. The dollar index has rallied by 2.5% since H2 and multinational companies’ sales will see their margins squeezed when converted back to dollars, which will raise many concerns over the dollar strength.

Markets want an explanation from ECB

Tapering has become one of the most hated words amongst investors, and markets want reassurance that the European Central Bank isn’t considering this option any time soon after unofficial reports said policymakers at the central bank were considering winding back their asset purchase program. In fact, current conditions require an extension to the QE program that ends in March 2017 to avoid any unwanted shocks to an economy that continues to face sluggish growth and stubbornly low inflation.

I don’t expect any monetary policy changes on Thursday and believe that Mario Draghi will reiterate that ECB is ready to do whatever it takes to preserve the euro. However, an extension of the current asset purchase program could be announced in December’s meeting after the staff release their new projections.

China’s Growth

After reporting a 10% fall in exports in September which triggered a global equities selloff last week, China will provide a snapshot on how the economy fared in Q3. Nobody wants a weak China at the moment, as this would send warning signals to global markets, especially since their debt has become one of the biggest challenges facing the second largest economy.  With China’s current debt to GDP standing at 249% according to BIS, a slowdown in economic growth has a potential to spark a banking crisis and a prolonged period of weak growth. Markets are forecasting a 6.7% growth in GDP in Q3, unchanged from previous quarter.  

Trumps’ final chance!

Drug tests are no more limited to Athletes, and U.S. presidential nominees should go through the process prior to debates, at least according to Mr. Trump. With almost three weeks to the U.S. presidential election, the Republican nominee wants to use all his weapons to gain ground on Clinton after losing many of his party’s supporters due to claims of sexual assaults. With nothing to lose, Donald Trump is likely to go all in in Las Vegas on Wednesday, so expect the unexpected.