Major Events of Last Week
The stock markets continued to slump last Friday by registering their worst weekly trading performance since June. For example, the US major indices struggled on the last day of the week typified by the Dow Jones Industrial Average crashing by almost 73 points; the S&P slipping lower by nearly 7 point and the NASDAQ dropping by almost 10 points.
Investors adopted an increasing risk aversion as last week progressed amid concerns that the US Federal Reserve is currently contemplating the viability of tapering its influential bond purchasing program as early as next month. These stimulus considerations completely overshadowed the encouraging news published by China last week which strongly indicate that its economy could now be emerging from the doldrums.
Important speeches delivered by key Fed committee members last week disclosed a growing consensus within the central bank to commence reducing its current quantitative easing policies sooner than later. These announcements were sufficient to cause investors to re-assess their present investment positions resulting in the markets pulling back from recent historic highs.
This fresh Fed uncertainty should continue the capped the upside of the equity markets during this coming week. With trading volumes low, investors will struggle to locate quality catalysts that could provide enough justification to drive stocks higher. The primary reason why the Dow Jones Industrial Average and the S&P 500 have rocketed by over 20% so far during 2013 has been the Fed stimulus policies. As such, any talk about tapering these influential programs will have an adverse impact on the markets.
Analysts summarized the latest Fed developments by advising that the central bank had helped create a good foundation for a strong equity market by plowing extensive amounts of liquidity into the system for well over five years. As such, Fed committee members are now adopting the viewpoint that the markets must begin to bite the bullet and start standing on their own two feet.
The publication of a spate of strong economic data from China towards the end of last week helped suppress investors’ concerns that the second-largest economy in the world was in decline and capable of derailing global growth prospects. Indicators released disclosed that Chinese manufacturing output had surged by over 9.5% during July completely outstripping analysts’ expectations. In addition, retail sales expanded by over 13%; inflation remained steady while exports were growing at a healthy pace.
What to Expect This Week
A number of important committee members of the US Federal Reserve delivered speeches last week which generally indicated that the Fed could begin trimming its asset purchasing program sooner-than-expected if both the US economy and labor market deliver signs of improvement. For example, Charles Evans, who is regarded as possibly the most dovish member of the Federal Open Market Committee (FOMC), even advised that tapering could commence in September.
As Fed future policy decisions are presently the biggest catalyst driving the markets, investors will now focus on a further series of Fed speeches to be presented this week. Dennis Lockhart, Atlanta Fed President, will kick off proceedings on Tuesday followed by James Bullard, FOMC voter and St Louis Fed President, later in the week. Analysts are expecting that both will issue statements endorsing the viewpoints expressed by their Fed colleagues during last week.
The USA published a mixed bag of economic data last week. The ISM non-manufacturing index and June trade balance disclosed figures than surpassed market expectations. In contrast, the weekly jobs claims and wholesale inventories were both weaker-than-expected.
This week, the USA is scheduled to post a spate of important economic indicators. The retail sales figure for July will be posted on Tuesday followed by the producer price index on Wednesday. Investors will have a busy time on Thursday dealing with the releases of the consumer price index, regional manufacturing surveys and the industrial production. Finally, housing starts and the University of Michigan sentiment survey will be published on Friday.
Elsewhere, economists will focus on the Eurozone when it issues its Gross Domestic Product number on Wednesday. Economists are predicting that this figure will disclose a quarterly gain of 0.2% implying that the region has finally emerged from seven consecutive quarters of recession. Deeper insights into this key result should reveal that the economies of peripheral members, such as Italy and Spain, are on the mend. Germany, France and the Netherlands are all predicted to register positive growth. However, even if such an encouraging picture is confirmed, the total growth of the region is still expected to be contracting on an annual basis, albeit at a slowing pace.