Take Five: AI trade meets the Fed

Oct 23 (Reuters) - An eye-catching week is in store as rate-setters at the Federal Reserve, European Central Bank and Bank of Japan announce policy decisions, while investors will gauge whether results from Alphabet, Amazon and Microsoft can fuel the next leg of the AI rally.

An election in Brazil, a gathering of China's top leadership and a closely watched British budget add political risk to the agenda.

Here's all you need to know about the coming week in financial markets by Lewis Krauskopf in New York, Kevin Buckland in Tokyo, and Dhara Ranasinghe, Marc Jones and William Schomberg in London.

1/ MOVE OVER

It's a packed week for central banks. The Fed, Bank of Canada and Reserve Bank of New Zealand meet on Wednesday, the ECB on Thursday, and the BOJ a day later.

The Fed, ECB and BOJ face no immediate pressure to hike rates after tightening last month.

Fed Chair Kevin Warsh will be pressed on his view on the rate outlook. The ECB is sure to face questions about surging French borrowing costs that risk becoming a flashpoint, while the BOJ may raise its inflation forecasts in a post-meeting report.

Markets expect Canada and New Zealand to hike rates to contain inflation, with all policymakers grappling with the extent to which high oil will fuel broader price pressures.

2/ HYPERSCALER HOT SEAT

A big week for US corporate earnings will be headlined by reports from three of the largest companies at the heart of the huge AI capital investment theme that has driven up equities.

Alphabet, Microsoft and Amazon — three of the so-called hyperscalers — will post results at a time investors are becoming wary of the risks of the spending on data centres.

The week will be critical to determining if the third quarter lived up to high expectations for US profit growth, with about one-third of S&P 500 companies reporting.

Other high-profile firms set to report include drugmaker Eli Lilly, oil majors Exxon and Chevron, and industrial equipment giant Caterpillar.

3/ FISCAL TIGHTROPE

British finance minister John Healey will announce his first budget on Wednesday, when he will try to offer some relief from higher energy prices to households, but without unsettling the bond market by ramping up borrowing.

That means Healey may have to accept a narrowing of his room for manoeuvre to meet his fiscal rules. Analysts polled by Reuters think he can allow his headroom to almost halve to around £15 billion ($20 billion) without spooking the market.

Banks might bear the brunt of tax increases, and the share prices of Britain's biggest lenders have fallen in the run-up to Healey's high-profile debut.

Bigger decisions on spending in areas such as defence, public services and welfare are likely to be put off until next year, with Healey hoping the Iran war — and the pressure it is putting on government borrowing costs — may have abated by then.

4/ NETANYAHU'S MOMENT OF TRUTH

Israel's election on Tuesday is poised to be one of the most consequential in the country's history.

Polls have it as a coin toss, with neither Prime Minister Benjamin Netanyahu's Likud bloc nor an opposition centred around former military chief Gadi Eisenkot expected to win a majority, raising the prospect of lengthy coalition negotiations.

Yet for markets, it also comes after an extraordinary rally in Israeli assets. Since 2023's October 7 attacks, the Tel Aviv stock market has surged more than 135%, while the shekel is up a world-beating 25%.

Analysts are quick to point out the AI boom has been key, given Israel's tech expertise, and will remain so. But investors also see the potential for tensions to be gradually dialled down in the longer term if Eisenkot and his allies can win out.

5/ PARTY PRIORITIES

China's top leadership gathers in Beijing for the four-day Fifth Plenum from Monday, with officials deliberating on "Advancing Full and Rigorous Party Self-Governance."

That may sound inward-looking, but official Chinese commentary frames the initiative as an effort to strengthen Party discipline and execution in response to a more challenging external environment, including an increasingly tense relationship with the United States and curbs on China's access to advanced foreign technology.

That's not to say Beijing doesn't face challenges at home too, with domestic demand stuck in a prolonged slump that has proved stubbornly resistant to stimulus efforts.

($1 = 0.7470 pounds)

(Graphics by Pasit Kongkunakornkul, compiled by Samuel Indyk. Editing by Mark Potter)