Market Perspective for October 17, 2016

Domestic markets are positioned to rebound this week following strong bank earnings on Friday.

Earnings season will move into full swing this week. Goldman Sachs (GS) and Morgan Stanley (MS) are expected to beat their earnings per share (EPS) and revenue estimates in response to rising market volatility and higher trading profits. SPDR Financial Select Sector exchange-traded fund (XLF) will benefit from financial sector growth.

Netflix (NFLX), Johnson and Johnson (JNJ), Verizon (VZ) and General Electric Co. (GE) are also on this week’s reporting schedule. NFLX far exceeded analyst predictions on Monday to send shares sharply higher. Cost-cutting measures and organic sales growth should ensure strong returns for JNJ, which also recently increased its full-year forecast. McDonald’s (MCD) will report on Friday.

Verizon’s pending acquisition of Yahoo (YHOO) was complicated by a massive data breach that occurred at the latter company. This is likely grounds for terminating the deal if Verizon wishes to back out.

The European Central Bank (ECB) will announce its latest interest rate decision on Thursday, though economists expect the ECB to leave rates unchanged. Modification to the central bank’s quantitative easing program, including a taper of bond buying similar to the Fed’s exit from QE, is rumored to be in the works.

Consumer Price Indexes (CPI) for the Eurozone, Britain and U.S. are expected to reveal modest increases. On Monday, the latest Empire State Manufacturing Index fell from minus 2 in September to minus 6.8 in October, signaling contraction in the New York area manufacturing sector.  Midweek, investors will hear the most recent figures on U.S. housing starts and the weekly crude oil inventory numbers. The Fed Beige Book will also be released Wednesday. Housing starts and building permits are forecast to rise slightly. Analysts expect crude stockpiles to drop close to a million barrels, which will buoy the recent rally in oil prices. Economists anticipate that the Beige Book will show continued strength in the overall economy.

While weekly unemployment claims are expected to rise slightly, they will still remain at multi-decade lows. Housing market analysts anticipate a slight uptick in existing home sales. China’s latest gross domestic product (GDP) figures will be released on Wednesday. The forecast is for a 5 percent increase in the nation’s GDP. China will also release new loan figures, along with real estate and fixed asset investment. The hefty amount of Chinese data could impact commodity markets during the week.

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