US and European equity markets paused for breath on Tuesday as investors on both sides of the Atlantic digested the latest corporate earnings reports and awaited the outcome of the Federal Reserve’s two-day policy meeting.
At the close in New York, the Dow Jones Industrial Average pared earlier losses and was up 0.1 per cent at a new record close of 12,127.88 and the S&P 500 was 0.03 per cent firmer. The technology-heavy Nasdaq Composite was 0.5 per cent lower, undermined by a disappointing statement from Texas Instruments, the chipmaker, on its earnings outlook.
Overall the third-quarter earnings season in the US has been very positive, with 73 per cent of those companies that have reported beating expectations and only 13 per cent falling short, according to Thomson Financial.
“This proves that the US economy is continuing to rock and roll,” said David Dropsey, research analyst.
Europe has also seen an encouraging trend, with roughly two-thirds of companies that have reported so far beating estimates.
The FTSE Eurofirst 300 index, which recently enjoyed a nine-day winning run, retreated just 0.02 per cent from Monday’s five-year high. The strength of earnings growth appears to back up the confident stance adopted by equity investors in recent weeks although Dominic White, economist at ABN Amro, said this appeared to raise a fundamental inconsistency.
“The equity market’s confidence about growth doesn’t seem to extend to the implications this has for inflation and interest rates,” he said. “With the US and global economies now operating near full capacity, even a modest recovery in growth could see inflation and interest rates rise further.”
Although virtually no one in the markets expects the Fed to raise interest rates on Wednesday, there will be much interest in how the central bank sees the outlook for inflation and growth – particularly with regard to the housing slowdown. There has been some evidence that the US housing market might not be as problematic as many had feared.
August housing starts unexpectedly jumped and Alan Greenspan, the former Fed chairman, recently said he thought the worst of the slowdown was over.
Christopher Towner, head of desk for risk management at HIFX, suggested that the equity market was picking up the baton in terms of momentum from the US housing market. He also noted that the housing markets in the UK and Australia, which were causing concern a year ago, had recovered.
“The majority of wealth in the US is in housing. However, the Americans also have a large proportion of their wealth tied up in equities,” Mr Towner said.
“If the Dow and lower oil prices can propel consumer confidence, then perhaps we will see the situation in the US economy follow the path to higher rates as in the UK and Australia.”
The dollar initially rose against the yen and the euro amid continued expectations that the Fed would re-emphasise its worries about inflation. The greenback’s early gains faded away as the session wore on.
Treasury bonds recouped some of Monday’s steep losses while European government bonds ended the day little changed as the market awaited Wednesday’s Ifo German business sentiment survey.
Oil staged a modest rally, with December West Texas Intermediate edging back above $59 a barrel in New York. Gold bounced off a one-week low as it took its lead from the oil price.
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