LONDON – Global financial markets will start Monday underpinned by the previous week's equity rallies, with investors focusing on the health of economies and companies while keeping a wary eye on military reprisals for the Sept. 11 attacks on the United States.
Stock, bond and currency market investors will seek to gauge the severity of the economic fallout from the attacks that destroyed the World Trade Center and damaged the Pentagon and triggered a buildup of U.S. and other military forces around Afghanistan.
Dozens of companies, especially in the travel and insurance sectors, have already said that sales or profits will be hit by the attacks and their aftermath, while the specter of recession is stalking many economies.
"The market is going to pay attention to economic numbers, along with what may or may not happen with the war," said Peter Cardillo, director of research at Westfalia Investments, in New York.
"This is an uncertain time and it is just going to keep this market trading with lots of volatility and no clear direction."
The possibility of military action against Afghanistan, which said Sunday it was holding Saudi-born Usama bin Laden, the man the U.S. has blamed for the attacks, would still be on investors' minds, though its impact would depend on its scale.
"I'm not sure military reprisals are going to weigh very heavily on the market. What would have been very bad is if it had come very quickly and been major," said Mike Lenhoff, who helps to manage more than $10 billion for private client fund manager Gerrard in London.
"If an attack is intended to be very tactical, very strategic, it strikes me that the market may take that as a bit of a relief."
Major stock markets rallied strongly last week, with U.S. blue chips rising more than four percent and European equities posting their best week since 1975.
But shares worldwide are down more than four percent since the attacks, which most economists say have tipped the U.S. into recession, posing a grave threat to global growth.
Oil has fallen more than 24 percent from its post-attack peaks to around $23 per barrel, as traders bet that consumer and industrial demand faces more of a threat from recession than supply does from war.
Bonds Eye Fed, Dollar Regaining Poise
For bond markets, which have rallied as investors seek the safety of a fixed return, attention will turn to upcoming U.S. economic data and the Federal Reserve's Tuesday interest-rate setting meeting.
Monday, the National Association of Purchasing Management is expected to report the U.S. manufacturing sector slowed some more in September. Analysts are forecasting the NAPM index fell to 45.5 in September from 47.9 in August. September car and truck sales data, also due Monday, are likely to be soft.
All eyes will be on Tuesday's meeting of the Federal Reserve's policy makers, who are expected to cut interest rates for a ninth time this year to bolster the sluggish economy.
Many analysts believe another rate cut of a half-percentage point, or 50 basis points, has been factored into the market.
"The Fed isn't going to play any games here," said Gerrard's Lenhoff. "It is going to give the market the 50 bps it expects and in its statement it will say it stands ready to do what is needed."
U.S. two-year bond yields hit all-time lows last week but rose slightly as stocks recovered to end Friday at 2.85 percent.
Currency markets will remain transfixed by the Bank of Japan's efforts to protect its economy from the effects of a stronger yen, which has risen against the dollar as worried investors bring money home.
The Bank of Japan has sold yen to buy dollars seven times since September 17, spending more than $19 billion, but has met with limited success.
A stronger yen makes Japanese manufacturers, already spluttering after a decade long slump, less competitive abroad.
The yen closed Friday at 119.59 to the dollar, compared to below 117 before the BOJ began intervening and 122 before the attacks.