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 Thursday's larger-than-expected stimulus package from the ECB lifted
U.S. stocks, helping indexes post gains for the week after three
straight weeks of losses.
But the increased stimulus measures from the ECB and elsewhere
globally, including the Bank of Canada, may make it tougher for the
Fed to move ahead with its own plan to start raising interest rates
by mid-year, lest U.S. economic policy move out of sync with the
rest of the world.
"Global central policy is not one of their mandates, but I think
they have to acknowledge it, because this is not just global
economic headwinds, this is actually the moves of other central
banks. They've got to take that into account," said Erik Davidson,
chief investment officer for Well Fargo Private Bank in San
Francisco.
Should the United States raise rates when other major developed
economies are being more expansive, that could boost the dollar,
putting further pressure on commodity prices - which because they
are denominated in dollars become more expensive for non-U.S.
investors - and adding to the threat of deflation.
The Fed is expected to reiterate that those global risks have not
yet put the U.S. recovery or the Fed's rate plans off track when it
issues its policy statement at the close of its two-day meeting on
Wednesday.
The timing of the Fed's eventual rate move has been a top concern
for investors. Stocks rallied when the Fed said after its December
meeting that it would take a patient approach toward raising
interest rates and gave an upbeat assessment of the U.S. economy.
The sharp decline in oil prices that began last June and worries
about deflation could keep the Fed on hold for longer, analysts
said.
"It bodes well for the Fed to be patient," said Peter Cardillo,
chief market economist at Rockwell Global Capital in New York.
"There's no inflation here; the problem is deflation. If oil prices
were to go lower, that could create more of a problem."
THE ATTRACTION OF EUROPEAN SHARES
At the same time, more money has been moving from the U.S. market
into European stocks as a result of the ECB measures, adding to
concerns for U.S. stock investors.
Sharp declines in the euro <EUR=>, which hit an 11-year low against
the dollar on Friday, make European stocks cheaper, especially
compared with U.S. equities.
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Flows into EPFR Global's European regional equity funds rose to
one-year highs in the week leading up to the ECB announcement, EPFR
Global said. Exchange-trade funds tied to Europe rallied following
the ECB move this week. The SPDR Emerging Europe ETF <GUR.P> jumped
3.7 percent this week, its biggest weekly gain since September.
Investors will also be watching elections Sunday in Greece. With the
leftist Syriza party - which has pledged to scrap austerity measures
and secure a debt write-off - leading in polls, the euro may see
further pressure.
Underpinning the argument for U.S. stocks, though, is the growing
strength of the U.S. economy while overseas economies have been
weakening.
"European equities will likely improve in the short term, but in the
medium term equity performance is likely to be tied to the
performance of the real economy," Rob Waldner, chief strategist at
Invesco, wrote in a note this week.
Next week also marks one of the busiest weeks for fourth-quarter
U.S. earnings, with 141 S&P 500 companies slated to report. Among
them are several top technology names including Apple <AAPL.O> and
Microsoft <MSFT.O>.
With fourth-quarter earnings projected to grow 10.6 percent, tech is
expected to be a bright spot in an earnings season that has been
lackluster thus far.
Profit growth expectations for S&P 500 companies, now at 3.3
percent, are down sharply since the start of the fourth quarter
following a big drop in forecasts for energy company earnings.
(Reporting by Caroline Valetkevitch; Editing by Leslie Adler)
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