Week in review 25 to 30 Oct 2010

Now it is time to review what has happened over the week and preview major events next week.

The overall mood in the market has turned a bit more cautious this week. Dollar and stocks fluctuated for most of the time, without much direction. There was quite a bit of focus in the past week on what will happen in the two big events in the coming week, which I will elaborate later. For now, let me briefly recap the week.

As usual, we have quite a number of economic data coming out as usual. This week, we have got Existing Home Sales of September rose while inventory dropped. On the first reading, it might sound very good, but as the foreclosure mess is still very messy, it will probably hurt the numbers in the coming months. We have also got the Case-Shiller Home prices index, which showed a slight drop in home prices in August. All these added together, it projects a rather gloomy picture of the housing market recovery, which does not surprise me given what happened in Hong Kong after 1997. Friday’s UofMich Consumer confidence number add to this gloom, as it dropped to the lowest level in almost a year.

GDP figures from the UK was better than expected, while that of US was in-line with economists estimates. The problem for the UK is that we are really not quite sure what will happen after the spending cuts. Without doubt, no one will question the need to cut deficit, but there is no agreement on the timing of spending cuts, thus I believe there will still be a bumpy road ahead for the UK economy. For the US, the number is still too low. As unemployment is close to 10%, some economists would probably estimate that the GDP growth need to be 3% or higher to create jobs such that the unemployment rate will be lower.

In Hong Kong/China markets, the focus was mainly on some big Chinese banks result. Most of them delivered better-than-expected earnings, although Bank of Communication (3328.HK) disappointed the market on higher provision for credit losses.

The focus of next week will be on two things: Mid-term Election, and the Fed FOMC meeting.

On the Mid-term Election, as an outsider, I do not have too much that I can say. What seems to be rather clear to me is that, democrats would have some heavy losses in both the Houses. It is rather understandable, as the economy is probably that the top of voters mind, and the Obama administration has largely failed to revive the economy to full strength, which is, to me, not entirely the fault of Obama’s team. After all, the United States is currently going through a recovery related to a financial crisis and the burst of real estate bubble, the deleveraging process is slow and painful, so you cannot expect the economy to recover soon. Nevertheless, most people would hope the economy can recover at once. Obama and his team is not magician, so given the high expectation on him when he sworn in, he is bound to disappoint.

To predict the impact of Republicans winning on the market and economy is a rather difficult task. Perhaps Republicans would be perceived as more pro-business, which is good for those companies. However, if the conservative wing of Republicans are gaining an upper hand, they might push too far on spending cuts and tax cuts, which will end up even worse.

For the FOMC meeting, perhaps all people agree that there will be QE2 in some form or other another. The question is how much. Reuters survey shows that most expect a monthly purchase of some $80-100bn, although the total amount varies wildly. There are some good reasons why the markets will correct no matter how large the QE will be, but the final outcome is still hardly predictable to be honest.

In short, the coming week will be full of uncertainties. Perhaps we can expect VIX to rise.

Finally, a few more charts:

S&P 500

VIX

Economic Calendar (Abridged)

Source: DailyFX

Just a random picture

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.