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Markets will continue to be driven by the three E’s

Economic data, earnings and elections have been the focus for markets in the past two weeks, and this is unlikely to change in the coming week.

Economic data, earnings and elections have been the focus for markets in the past two weeks, and this is unlikely to change in the coming week.

In the United States, markets will get a preliminary indication of the country’s third quarter economic performance this Friday when the advance estimate is released. Bloomberg’s survey shows that markets are looking for the growth rate to pick up to 2.5 per cent from a subdued 1.4 per cent in the second quarter.

Markets will be keen to see how personal consumption spending, a key driver of the economy, fares. Close attention will also be paid to business spending, which has been weak, and a pick-up is generally seen as necessary to place the recovery in the US on a firm footing. Third quarter inflation and labour cost data will also be scrutinised to assess the likelihood of an imminent rate hike by the US Federal Reserve.

Elsewhere, in Japan, national inflation data for September will be released on Thursday. This data will be eagerly anticipated after the consumer price index fell by 0.5 per cent in August. The inflation rate in Japan has been disappointingly weak in recent months and is well below the Bank of Japan’s (BOJ) 2 per cent target. This has led to fears that deflation could resurface, and has raised questions about the effectiveness of the BOJ’s monetary policy.

Other than economic data, markets will also be keeping a close eye on the ongoing US third-quarter earnings season, which has failed to excite investors so far. If the composite earnings of S&P 500 companies decline in the third quarter, it will be the sixth consecutive quarter of year-on-year decline.

This is not the best piece of news for US equities, as earnings are especially critical at this juncture, and since Wall Street is trading at record highs and is susceptible to a correction given stretched valuations.

Finally, the US Presidential elections will remain in focus even though polls show Mrs Hillary Clinton leading Mr Donald Trump. Investors will not be complacent, especially after Brexit polls were proven wrong when the UK voted to exit the European Union.

Vasu Menon is Vice President and Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

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