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US economy expected to strengthen

US Federal Reserve and Bank of England to take centre stage this week

Central banks will take centre stage again this week, with both the US Federal Reserve and the Bank of England expected to make monetary policy announcements in the later half, after the European Central Bank decided to extend quantitative easing in the eurozone, albeit at a slower pace, last week.

There has been an unexpectedly early Santa rally in stock markets over the past month or so.

And if no surprise squalls show up to dampen the party, the local benchmark index may stand some chance of hanging on above the 2,900-point threshold through to the year-end.

The Fed, which will meet for its final monetary policy meeting of 2016, will put out the meeting minutes in the wee hours of Thursday morning, Singapore time.

Market consensus is that the Fed will almost certainly raise the benchmark Fed funds target rate by another 25 basis points, echoing its December hike a year ago.

The probability of a December 2016 hike was 94.9 per cent as at yesterday, according to data from derivatives exchange CME Group's FedWatch page.

In addition, the Bank of England is set to release its monetary policy summary on Thursday night, Singapore time, though it is broadly expected to keep rates on hold.

Either way, the Fed's economic projections for 2017 will likely steal the show.

Analysts are largely expecting the US economic recovery to continue and the greenback to strengthen, and will be looking for confirmation of that.

Optimism over the outlook for the world's biggest economy pushed Wall Street to record highs last week.

The Dow climbed 0.7 per cent, the S&P 500 rose 0.6 per cent and the Nasdaq advanced 0.5 per cent on Friday.

CHANGE

"The glow of change under a new leadership should excite the US market as Trump prepares for his inauguration and works out his first 100 days in office," DBS Group Research regional equity strategist Joanne Goh said in a note on Friday.

"We expect a flood of upgrades on the US economy, bond yields, Fed hikes, and US dollar to follow as the year begins.

"The new Trump era is perceived by investors as a pro-growth, equity-friendly political environment, but comes with higher yields and inflation."

She upgraded Singapore stocks from neutral to overweight, saying that although Asia equities will likely be volatile in the first three months of 2017, the Republic "serves as a good place to seek refuge considering its low valuations, bottomed-out economic cycle and middle-of-pack currency basket".

The Straits Times Index ended Friday at 2,956.13 points, a slight 2.73-point, or 0.1 per cent, dip from Thursday, but still fairly close to the highest point it has touched this year, which was 2,960.78 on April 21.

The index has climbed 168.86 points over the past four weeks, from 2,787.27 points on Nov 14.

That 6.1 per cent gain over the period can be considered rather solid for the usually lethargic STI, and the index was up 2.6 per cent year-to-date as at Friday.

As AMP Capital economist Shane Oliver put it in a Saturday note: "Normally the Santa rally doesn't come till mid-December but he seems to have arrived early this year!"

Though he cautioned that shares "remain overbought and are vulnerable to the Fed meeting in the week ahead", he nonetheless expects stocks to continue trending higher into year-end and over the next 12 months.

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts

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