Major Events of Last Week
Last Friday, the global stock markets pared the substantial gains that they acquired after the US Federal Reserve announced its surprising policy decision last Wednesday to retain its influential monthly bond purchasing plan at full throttle. The US major indices slumped towards the end of last week typified by the Dow Jones Industrial Average crashing by almost 180 points; the S&P 500 slipping lower by 12 points and the NASDAQ dropping by nearly 16 points.
Earlier during last week, analysts were completely taken aback after the Fed completely refrained from instigating any tapering actions, as widely expected, to rein in its massive stimulus policies. Consequently, jubilant investors caused the stock markets to rocket higher on the prospect of an extended bout of easy money. For example, the Dow Jones Industrial Average and the S&P 500 surged higher to record historic highs. The commodity markets were also prime beneficiaries exemplified by gold rallying strongly and reversing its recent downturn. This precious metal always performs well whenever global stimulus policies are either instigated or extended.
Investors concluded that the Fed dovish approach was a definitive sign that the US economic recovery was still struggling. This viewpoint acquired additional credence on Friday when James Bullard, the President of the St. Louis Federal Reserve Bank, commented in an interview that tapering could commence in October but such a move was highly dependent on the quality of US economic data that will be released during the interim.
Analysts were not totally impressed by the bullish market moves of last week. In contrast, they stressed concerns that investors have acquired an unhealthy obsession with Fed deliberations and prolonged easy money instead of basing their decisions on the real factors driving the global economic recovery. They added that this biased preference could be dangerous as it could eventually generate a sharp and sudden market correction.
As such, some professional advisors were informing their clients towards the end of last week to maintain their cool and not get carry away by the current euphoria. Specifically, they advised that the Fed has certainly reduced the level of uncertainty and that the stock markets are definitely not registering overbought statuses at present. Nevertheless, they further stressed that the possibilities are now strong that a sizeable correction could occur before the next meeting of the Federal Open Market Committee in October.
What to Expect This Week
Following the outcome of the German elections, which will be held over this weekend, the Eurozone will then have a busy week ahead of it as a spate of important economic indicators are scheduled to be published. For instance, the PMI data for September will be issued for the entire Currency bloc. Germany will also release its IFO survey for September together with key inflation figures. Analysts are predicting that the PMI numbers will disclose additional improvements for the third consecutive month in both the manufacturing and servicing sectors.
The IFO survey is anticipated to reveal a rise in business sentiment by recording its highest value in almost one year. Investors will also monitor the posting of CPI data from Germany which should confirm that inflation is well under control. This result is expected to register a value of 1.5%, which, if confirmed, will fall significantly beneath the 2% guideline of the European Central Bank. As such, the ECB may then gain fresh support to retain its monetary easing policies in place for an extended time period if inflation pressures are proven to be receding.
The Federal Open Market Committee stunned investors last Wednesday by retaining its asset purchasing plan in full force at $85B monthly. This announcement was far more dovish than anticipated as the analysts were expecting the Fed to instigate a stimulus slowdown. In his ensuing press conference, Ben Bernanke, the Fed Chairman, advised that tapering could still commence later during this year, but that such an action is highly dependent on the quality of future US economic data.
During this week, important surveys of consumer confidence are scheduled to be posted by the USA including those from the University of Michigan and the Conference Board. In addition, the durable goods figures for August will be published followed by personal spending and income. Key data for the housing sector will also be issued including the new and pending home sales for August. Another market moving event could be the publication of the third and final revision of the US Gross Domestic Product for the second quarter of 2013. This figure is expected to disclose a minor upwards revision to 2.6% annualized from the previous estimate of 2.5%.