Major Events of Last Week
The events that had the largest impacts on the markets last week were, without doubt, the congressional testimony of Ben Bernanke, the Chairman of the US Federal Reserve, and the publication of the minutes from the latest Federal Open Market Committee (FOMC) meeting. These events disclosed an increasing amount of uncertainty about when the Fed will begin to taper its extensive asset-purchasing program. Fears that such be move may be sooner than expected caused investors to rapidly reassess their risk appetite.
Consequently, the recent bullish movements of global equities stalled last Friday with the Dow Jones Industrial Average inching higher by just 8 points; the S&P 500 slipping lower by 0.6% and the NASDAQ sliding by almost 0.3%. The markets have enjoyed a substantial rally during 2013 so far which has seen the major US indices hit historic highs. The primary catalyst behind this development has been the $85 billion monthly asset purchasing policy implemented by the Fed.
As such, any speculation that this stimulus package could be terminated or even just reduced is sufficient to replace investor confidence with a fresh sense of caution. This viewpoint certainly acquired additional credence last week after the FOMC minutes revealed that a number of committee members were postulating that a scale back should commence as early as June.
An important economic indicator was released by the US Commence Department last Friday divulging that orders for durable U.S. manufactured goods had risen by 3.3% during April which surpassed analysts’ expectations. This result was a promising sign that the recent declines in factory production could be reversing.
Elsewhere, the publication of an encouraging IFO survey from Germany demonstrated that business confidence had increased more-than-expected during May. If additional data can now reinforced this figure over the coming weeks by confirming that the German economy is definitely on the mend then such endorsements will reduce the pressure on the European Central Bank (ECB) to initiate new monetary easing policies in the imminent future.
What to Expect This Week
After Ben Bernanke and the FOMC minutes clearly set the alarm bells ringing last week, investors will now have to focus carefully on all new market changes over the coming days. Specifically, they will need to seek any insights and clarification into precisely when the Fed will commence cutting back on its monetary easing policies.
Identifying such a time-scale for this key event is very important as it could be the catalyst capable of stifling the present bullish euphoria. To that end, the USA is scheduled to publish a spate of important economic indicators this week. On Thursday, the Jobless Claims figure and the Gross Domestic Product will be posted followed by the Personal Income and Outlays on Friday.
The Eurozone will also be busy over the coming days. As such, the markets will be keen to assess any new economic evidence endorsing the very promising German data released last week. In particular, data will be posted that will include a flash CPI estimate together with business, economic and consumer confidence figures for May. Although analysts are forecasting that the CPI will increase from 1.2% to 1.4%, such a result, if confirmed, would still be beneath the target level of the ECB, which is 2%.