Major Events of Last Week
The Stock Markets spend last Friday coming to terms with the reality of the plans announced by the US Federal Reserve last Friday to commence trimming back its wide-ranging stimulus packages later this year. Assertive statements made by Ben Bernanke, the Fed Chairman, endorsing these intentions during the middle of last week, sparked a major equity and commodity sell-off last Wednesday and Thursday.
Stocks managed to stabilize to a certain degree during a turbulent session on Friday characterized by the Dow Jones Industrial Average climbing by almost 75 points; the S&P 500 inching higher by nearly 8 points but the NASDAQ slipping lower by just over 6 points. Investors gained a level of fresh confidence after learning that a potential banking crisis in China may now be avoided.
The major event last week was, without question, the production of a timescale by the US central bank to commence reducing its massive quantitative easing measures, such as its influential monthly bond buying program. As these important measures have been the cornerstone of the impressive gains acquired by the financial markets this year, their pending reduction and removal are now causing investors to totally re-evaluate their investment portfolios.
The US dollar was one of the major beneficiaries of the Fed’s new intentions as it appreciated in value against a basket of other currencies to register its best weekly gain in over twelve months. Specifically, the greenback surged against the euro epitomized by the EUR/USD plummeting by over 250 pips during the final three consecutive days of last week. Similarly, the US Dollar rocketed higher against the Yen last Friday for the sixth consecutive trading day.
Prominent market analysts summarized last week’s developments by stating that the Fed’s disclosed timescale will now dampen risk appetite and drive investors towards the sanctuary of safe-haven assets, such as gold and treasuries, at the detriment of riskier investments, such as stocks. They also added that they anticipate that the markets will experience significant levels of volatility during the imminent future as traders adjust their portfolios by unwinding precarious positions.
What to Expect This Week
In summary, the USA just had a relatively good week as most of the economic data published during this period was better-than-expected. For example, consumer prices matched analysts’ expectations despite a slightly weaker CPI figure indicating that inflation was still under control. Manufacturing output surprisingly registered a positive growth reading for June. Promising housing data was also posted exemplified by an existing home sales figure which surged during May to its higher level since the end of 2009.
Now that the Fed has set the scene, investors will need to concentrate during this week on the release of a spate of key US economic indicators. These events will take on greater significance as they could provide deep insights into future Fed policy decisions. Specifically, Durable Goods Orders and New Home Sales will be issued this coming Tuesday. Gross Domestic Product will be announced on Wednesday followed by Jobless Claims and Personal Income on Thursday. All these releases have the potential to be market-movers especially if their posted figures deviate from expectations.
The most significant event last week influencing the Eurozone was the Finance Ministers meeting which devised a list of new policies aimed at effectively injecting financial aid into the region’s struggling banks via the European Stability Mechanism (ESM). Guidelines were generated enabling financial institutions to receive up to $6 billion providing that they compile with strict stipulations.
Consequently, investors will need to clarify during this week whether the new model introduced will mirror the controversial funding one deployed in Cyrus earlier this year and whether it will become a standard mechanism throughout Europe. This is because, if confirmed, they could then be required to support bank bailouts in order that the ESM will release any bailout aid. The Eurozone is scheduled to post two important economic indicators this week. On Thursday, the EC Economic Sentiment will be issued followed by the Italian Consumer Price index on Friday.