NEW YORK: China's surprise move over the weekend to let its currency be more flexible should give stocks a lift, adding to the recent positive momentum and making it tougher for bears to argue for weaker fundamentals.
But seesawing sentiment, and some doubts about just how much China might let its currency appreciate, could roil the markets as investors scrutinize comments from the Federal Reserve to gauge the strength of the economic recovery.
China's announcement on Saturday, June 19 signaled it was ready to break a 23-month-old peg to the dollar and should bolster shares of companies that do a great deal of business there, like heavy equipment maker Caterpillar and beverage titan Coca-Cola.
Over time, China's move could promote exports to the rapidly growing country while averting a trade spat with the United States over the undervalued yuan in the near term.
"This could be very therapeutic for global markets," said Peter Kenny, a managing director at Knight Capital Group in Jersey City, New Jersey. "There is a lot of negativity in the market and bears see a short-term top and see the third quarter as a significant challenge for the market. This will give the bears and the market something new to play with.
China dominates sales at many multinational US companies. It has become Caterpillar's No. 1 export market, while fast food restaurant company YUM Brands reaps more than a third of its profit from China.
The revaluation will effectively increase the purchasing power of Chinese buyers and "the best bet would be for commodity-based companies and consumer goods companies," said Tom Sowanick, chief investment officer at Omnivest Group in Princeton, New Jersey.
But some argue the near-term impact of the China news will be limited. Hedge fund manager Doug Kass of Seabreeze Partners said, "They've consistently overpromised and underdelivered."
Aside from the China news and the statement from the Fed's rate-setting meeting, investors will take in data on the housing and labor markets, consumer sentiment and the final reading for first-quarter gross domestic product.
Despite rapid intraday changes in direction, the market has managed to build a more positive tone since hitting a seven-month-low in early June. The S&P 500 decisively scaled its 200-day moving average last week, a key technical marker that could trigger more buying.
But investors are expecting action to be choppy, particularly with volume drying up last week, which can make it easier to move the market around.
Concerns over sovereign debt woes in Europe and the BP Plc oil spill in the Gulf of Mexico have been an overhang, and investors will be watching for comments from officials ahead of a meeting of the Group of 20 this week.
"A positive read on the 200-day moving average supplies an underpinning and support for market sentiment that has proven to be important to this particular period (of the) market," said John Stoltzfus, senior market strategist at Ticonderoga Securities in New York.
"Anything outsized, whether it's disappointing or positive, gets either punished or rewarded by the markets very quickly."
Fed ahead
The Fed is expected to reiterate its commitment to keeping interest rates "exceptionally low" for an "extended period" at the end of its two-day meeting on Wednesday.
Last month's disappointing payrolls figure make it all the more unlikely the central bank will change its stance, said
Phil Orlando, chief equity market strategist at Federated Investors, in New York.
"We think the Fed's forced to reset the clock and wait for a better, more consistent string of nonfarm job creation," said Orlando.
"We're not thinking the rate hike cycle commences before 2011, at the earliest."
Investors are also watching to see if the Fed discusses the sovereign debt crisis in the euro zone and its impact on the US economy.
"If the FOMC comments indicate that they're not too concerned about the fallout from Europe on the US, we will continue to see the market in an upward trend," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
Reassurances from world leaders over the European debt situation ahead of the G20 summit in Toronto on June 26-27 could also soothe investors' nerves.
Technically speaking
The S&P 500 has held above its 200-day moving average since Tuesday, providing a bullish signal, but it has bumped up against resistance around the 1,121 level, the point that marks the halfway point between the October 2007 historic highs and the lows of March 2009.
Orlando said the fact that the index retested and bounced off the low for the year earlier this month is another positive sign, as investors appear to be ignoring negative data in favor of cheap prices.
"If that's happening, that suggests we're going to be back in an uptrend because investors are ignoring near-term noise and are focused on what I think is a very attractive longer term valuation picture," said Orlando.
Kicking off this week's round of data will be existing home sales for May on Tuesday, while new home sales for the same month are expected on Wednesday. Existing home sales are expected to rise to 6.15 million units from 5.77 million the month before, and new home sales are expected to dip to 420,000 units from 504,000, according to a Reuters poll.
Weekly initial claims on Thursday are expected to ease to 464,000 from 472,00 the week before. Also Thursday, durable goods for May are expected to fall by 1.1%, compared to a gain of 2.8% in April.
Rounding out the week, the final reading of first-quarter GDP is expected to show a gain of 3%, in line with the previous reading. The final reading of June consumer sentiment is expected to come in at 75.5, also in line with its earlier reading. ' Reuters
But seesawing sentiment, and some doubts about just how much China might let its currency appreciate, could roil the markets as investors scrutinize comments from the Federal Reserve to gauge the strength of the economic recovery.
China's announcement on Saturday, June 19 signaled it was ready to break a 23-month-old peg to the dollar and should bolster shares of companies that do a great deal of business there, like heavy equipment maker Caterpillar and beverage titan Coca-Cola.
Over time, China's move could promote exports to the rapidly growing country while averting a trade spat with the United States over the undervalued yuan in the near term.
"This could be very therapeutic for global markets," said Peter Kenny, a managing director at Knight Capital Group in Jersey City, New Jersey. "There is a lot of negativity in the market and bears see a short-term top and see the third quarter as a significant challenge for the market. This will give the bears and the market something new to play with.
China dominates sales at many multinational US companies. It has become Caterpillar's No. 1 export market, while fast food restaurant company YUM Brands reaps more than a third of its profit from China.
The revaluation will effectively increase the purchasing power of Chinese buyers and "the best bet would be for commodity-based companies and consumer goods companies," said Tom Sowanick, chief investment officer at Omnivest Group in Princeton, New Jersey.
But some argue the near-term impact of the China news will be limited. Hedge fund manager Doug Kass of Seabreeze Partners said, "They've consistently overpromised and underdelivered."
Aside from the China news and the statement from the Fed's rate-setting meeting, investors will take in data on the housing and labor markets, consumer sentiment and the final reading for first-quarter gross domestic product.
Despite rapid intraday changes in direction, the market has managed to build a more positive tone since hitting a seven-month-low in early June. The S&P 500 decisively scaled its 200-day moving average last week, a key technical marker that could trigger more buying.
But investors are expecting action to be choppy, particularly with volume drying up last week, which can make it easier to move the market around.
Concerns over sovereign debt woes in Europe and the BP Plc oil spill in the Gulf of Mexico have been an overhang, and investors will be watching for comments from officials ahead of a meeting of the Group of 20 this week.
"A positive read on the 200-day moving average supplies an underpinning and support for market sentiment that has proven to be important to this particular period (of the) market," said John Stoltzfus, senior market strategist at Ticonderoga Securities in New York.
"Anything outsized, whether it's disappointing or positive, gets either punished or rewarded by the markets very quickly."
Fed ahead
The Fed is expected to reiterate its commitment to keeping interest rates "exceptionally low" for an "extended period" at the end of its two-day meeting on Wednesday.
Last month's disappointing payrolls figure make it all the more unlikely the central bank will change its stance, said
Phil Orlando, chief equity market strategist at Federated Investors, in New York.
"We think the Fed's forced to reset the clock and wait for a better, more consistent string of nonfarm job creation," said Orlando.
"We're not thinking the rate hike cycle commences before 2011, at the earliest."
Investors are also watching to see if the Fed discusses the sovereign debt crisis in the euro zone and its impact on the US economy.
"If the FOMC comments indicate that they're not too concerned about the fallout from Europe on the US, we will continue to see the market in an upward trend," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
Reassurances from world leaders over the European debt situation ahead of the G20 summit in Toronto on June 26-27 could also soothe investors' nerves.
Technically speaking
The S&P 500 has held above its 200-day moving average since Tuesday, providing a bullish signal, but it has bumped up against resistance around the 1,121 level, the point that marks the halfway point between the October 2007 historic highs and the lows of March 2009.
Orlando said the fact that the index retested and bounced off the low for the year earlier this month is another positive sign, as investors appear to be ignoring negative data in favor of cheap prices.
"If that's happening, that suggests we're going to be back in an uptrend because investors are ignoring near-term noise and are focused on what I think is a very attractive longer term valuation picture," said Orlando.
Kicking off this week's round of data will be existing home sales for May on Tuesday, while new home sales for the same month are expected on Wednesday. Existing home sales are expected to rise to 6.15 million units from 5.77 million the month before, and new home sales are expected to dip to 420,000 units from 504,000, according to a Reuters poll.
Weekly initial claims on Thursday are expected to ease to 464,000 from 472,00 the week before. Also Thursday, durable goods for May are expected to fall by 1.1%, compared to a gain of 2.8% in April.
Rounding out the week, the final reading of first-quarter GDP is expected to show a gain of 3%, in line with the previous reading. The final reading of June consumer sentiment is expected to come in at 75.5, also in line with its earlier reading. ' Reuters
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