A widely anticipated euro zone interest rate rise, the first in five years, and all-important US jobs data will drive sentiment on European stock markets next week, overshadowing the tail-end of the earnings season.
Investors will scour a batch of updates from blue chips such as banking giants HSBC Holdings Plc and Barclays Plc, Dutch retailer Ahold NV, steelmaker Corus Group Plc and caterer Compass Group Plc for clues on how they see business in the new year.
Yet a month away from Christmas, investors may be reluctant to open new positions that could endanger this year's near 20 percent market returns. They are also cautious on prospects for 2006, likely to deliver slower economic and profit growth.
"I don't think we should be looking at double-digit returns on equity markets next year," said Michala Marcussen, associate strategy director at Societe Generale Asset Management. "This is normal, this is the economic cycle maturing."
Marcussen said investors could be surprised by the strength of growth if companies invest more aggressively or if they start hiring forcefully, which would lift consumer sentiment.
"But I don't think this is a likely outcome," she said.
The FTSEurofirst 300 index of pan European blue chips was up 0.2 percent at 1,247.6 by midsession Friday, looking set to end the week with a gain of around 0.8 percent. At the foremost of investors' concerns is a European Central Bank interest-rate setting meeting on Thursday, which is widely expected to approve the first euro zone rate hike in five years. All 63 economists polled by Reuters this week expect rates to be raised to 2.25 percent from 2.00 percent on December 1.
ECB President Jean-Claude Trichet took financial markets by surprise last Friday when he said the ECB was ready to raise rates moderately. The comments stirred worries that the central bank would start tightening credit before the region's economy is firing on all cylinders or its labour market is robust. Investors will hope for clues on how many rises may follow Thursday's hike, amid worries that higher rates could throw the region's fragile economy recovery off the track.
But some observers said such worries were exaggerated.
"The two rate hikes we have in our scenario are certainly not going to be the element that kills off the economic recovery," Marcussen said. "Monetary conditions are not the problem in the euro zone. A rigid labour market or the lack of liberalisation in services are the real issues."
Marcussen said the ECB was unlikely to raise interest rates by more than 50 basis points in the coming months as growth in the US economy starts slowing, crippling the dollar.
US data on consumer confidence and durable goods on Tuesday, third-quarter gross domestic product and Chicago PMI on Wednesday, and construction spending and ISM manufacturing on Thursday will show how the world's biggest is faring.
"We expect US activity to slow down in the fourth quarter as consumers start getting out of breath as the Fed's monetary policy start bearing its fruits," said Valerie Plagnol, senior economist at French broker CM-CIC.
Plagnol expects Friday's US jobs data to show a rebound in employment after the disruption that followed hurricane Katrina. "But it is not sure it will last. We are in a scenario of tamer economic growth and someone has to pay the oil bill."
Plagnol said companies would be able to pass on higher raw materials costs to the consumer only for as long as the consumer, whose finances are already restricted by soaring heating bills, can stand it.
Speeches from Fed Chairman Alan Greenspan and the heads of the Federal Reserves of San Francisco, Philadelphia, Dallas and Boston may lend clues on inflation or monetary policy - issues also likely to top the agenda of the Group of Seven meeting of finance ministers and central bankers at the end of the week.