Major Events of Last Week
Although the USA posted a spate of lukewarm economic indicators last Friday, the global stock markets still managed to rally exemplified by the Dow Jones Industrial Average surging by nearly 75 points; the S&P 500 creeping higher by almost 5 points and the NASDAQ climbing by just over 6 points. In fact, the S&P 500 succeeded in registering its biggest weekly gain in nearly two months. However, investors were still clearly nervous ahead of the 2-day conference meeting of the Federal Open Market Committee that commences next Tuesday, 17th September.
Economic data published by the USA late last week disclosed just minor retail sales growth during August while consumer confidence had even slipped lower. These results provided further credence to the viewpoint that the US economic recovery is presently sluggish at best and strongly suggest that the US Federal Reserve will now have a more difficult task justifying any early tapering of its influential stimulus policies.
Additional concerns about the overall health of the USA economy arose after another report was issued last Friday revealing a worrisome increase in wholesale prices during August. The primary catalyst about this disturbing development was a rise in energy costs. However, many prominent analysts were quick to predict that they still expect that the Fed will commence reining in its massive monthly asset purchasing program this month, albeit at a slower pace. They further added that although global equities finished higher last Friday, investors were still obsessed with Fed speculation.
The US Stock markets are now forecasted to trade a restricted range until next Wednesday when the Fed will announce its new policy decisions. A basic lack of clarity during the interim should cap any extensive gains while the quality of global economic data should prevent any serious sell-offs. On the commodity front, a significant reduction in Syrian tension caused gold to record its worst weekly performance since early June.
The US Dollar acquired fresh support late last week after a major Japanese newspaper issued a report claiming that Larry Summers, the former US Treasury of State, will be selected soon to replace Ben Bernanke as the new head of the US Federal Reserve. This statement, despite the quality of its source, was sufficient to help drive global equities higher last Friday. This is because Larry Summers is more likely to tighten quantitative easing policies quicker than Janet Yellen, the other main candidate. However, the White House refrained from confirming the Larry Summers selection last Friday.
What to Expect This Week
This coming week would be pivotal as it could witness dramatic spikes in market volatility. This is because months of intense speculation could finally end when the US Federal Reserve announces its latest policy decisions this coming Wednesday. As such, investors will finally discover whether the Fed plans to commence trimming back its massive stimulus support.
The US central bank has now injected nearly $2.75 trillion into the markets since the 2007/2008 financial meltdown which has helped the major indices to recover from record lows to register historic highs just a few months ago. As such, any speculation that the Fed will now start reversing its policies could be enough to prompt investors initiating a serious sell-off in equities.
However, analysts are presently proposing that even if tapering is instigated this week, then the ensuing reaction may not be overwhelming as the markets have already priced-in a degree of monthly trimming. Nevertheless, viewpoint will only be valid if the level of the slowdown proposed does not generate any surprises by being seriously larger or smaller than analysts’ expectations.
In fact, a poll published late last week disclosed that most economists have reduced their estimated size of monthly tapering from$15 billion per month to just $10 billion following the recent release of a poor US labor Report for August. The Fed has also adopted a clear policy of total transparency by attempting to communicate its intentions to the markets over the last few months. Consequently, investors have been primed to expect a degree of tapering this week.
The main jokers in the pack are now if a surprise move is announced this Wednesday producing figures that substantially differ from the anticipated ones. Also, the subsequent press conference to be conducted by Ben Bernanke would be pivotal especially if his speech contains any surprise comments and insights about future Fed policy intentions.