Financial Markets Review & Preview for Week Starting 19th May 2013

Major Events of Last Week

News was posted on Friday disclosing that the US Federal Reserve could commence curtailing its aggressive asset purchasing program over the coming summer months. Global stocks responded positively to this development epitomized by the Dow Jones Industrial Average surging higher by over 120 points; the S&P 500 inching upwards by nearly 1% and the NASDAQ rising by over 30 points.

The US Dollar enjoyed another good day since it always benefits whenever rumors circulate that the Fed may slacken its current monetary easing policies. The S&P 500 pared most of the losses that it had racked up during the earlier part of last week after US consumer sentiment hit highs not seen since six years ago.

The catalysts behind these new bullish movements were the publication of a spate of encouraging US economic data. As already mentioned, a better-than-expected US consumer sentiment reading demonstrated that American citizens were starting to feel more optimistic about their future economic and financial prospects. The posting of an index representing future economic activity also boosted investor confidence as this figure rose to an almost five year high during April. These two promising numbers were well-received by the markets as they managed to offset a proportion of the negativity generated by a series of disappointing US economic indicators issued on Thursday.

The euro weakened substantially against the US Dollar last week with the EUR/USD plunging to a six-week low. The single currency was under constant pressure following the release of a disturbingly weak Gross Domestic Product figure by the Eurozone earlier during the week. This number demonstrated that the economy of the region had contracted for the sixth consecutive month. The Euro subsequently suffered at the hands of the greenback amid growing speculation that the European Central Bank will instigate additional monetary easing policies.

Specifically, analysts are predicting that the ECB will activate negative deposit rates in the imminent future. Such a policy would effectively charge European banks a fee for maintaining their money overnight with the ECB. The primary concept behind this move would be to encourage regional banks to lend more money to cash-strapped businesses operating within the currency bloc.

What to Expect This Week

The major economic data to be produced by the Eurozone this week will be its PMI surveys this coming Thursday. Economists are predicting small increases with the service PMI inching higher from 47.0 to 47.2 and the manufacturing one climbing from 46.7 to 47. Although these will be encouraging signs, if confirmed, the impacts of these improvements are still likely to be submerged by the recent spate of more disappointing results. With the current general viewpoint pointing to persistent European economic weakness, the Euro is expected to extend its losses over the coming days.

In the USA, investors will focus this week on obtaining increasing clarification about the exact intentions of the Fed with regards to its present stimulus packages. This is because a number of conflicting events have occurred during the past couple of weeks. For instance, disappointing data indicating low inflation and an anemic labor market would suggest that the Fed will maintain its present policies for the foreseeable future.

However, speeches from prominent Fed members seem to indicate otherwise. For example, Williams commented last week that the Fed could commence reducing its asset purchasing program over the coming summer months. Three other prominent Fed presidents have backed this viewpoint by also calling for an early curtailment of present Fed monetary easing strategies.

Consequently, investors will be keen to study the latest FOMC minutes to be published this week. In addition, a number of other important Fed members are scheduled to speak including Bullard and Evans. The Fed Chairman, Ben Bernanke, is due to testify before the Senate in Washington on Wednesday. Economists and analysts will closely monitor all these events in order to acquire clarification about the Fed’s exact future intentions. The USA will post more important economic data this week including jobless claims, durable goods and housing data.

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