Sunday, September 19, 2010

All eyes on the Fed

North American stock markets headed higher this week on some encouraging news from the U.S. For the week, the Dow went up 1.4%, while the S&P 500 rose 1.5%. The Nasdaq jumped 3.3%.

Early in the week, markets received a lift when it was announced that the Basel III regulations would take effect in 2019, giving banks sufficient time to raise capital in order to meet the new requirements. On Tuesday, it was announced that U.S. August retail sales grew at 0.4%, which was double the 0.2% that economists expected. In addition, better-than-expected quarterly results from Oracle and RIMM caused the Nasdaq to end up 3.3% for the week. 

Gold continues to soar

Gold hit 3 record highs this week, as it rose as high as US$1284/ounce. Meanwhile, silver hit its highest level since 1980 by reaching US$20.816/ounce. This showed that while positive data continued to emerge from the U.S., investors were still concerned about the possibilities of deflation and a double-dip recession.
In fact, Germany's investor confidence index hit negative territory this week as it reached its lowest level in 19 months, and the OECD revised down its economic forecast for the G7 for the second half of 2010, from 1.75% to 1.5%. 

More trouble from the euro zone

Trouble continued to emerge from Ireland this week as investors worried that the government might have to seek EU and IMF aid in its bail-out of Anglo Irish Bank. The Irish government announced earlier this month that it will have to provide further capital to Anglo Irish Bank. Ireland's 10-year government bond rose to a yield of 6.4% this week, the highest since the euro was adopted in 1999. In addition, the yield on government bonds of the other PIIGS nations also rose.

Geithner criticizes Chinese currency

US Treasury Secretary Timothy Geithner stated in a Senate hearing that China's currency, the Reminbi, is severely undervalued. He also said that he will use different measures to pressure China to act quickly. With US mid-term elections in two months, it is likely that tariffs will be placed on imports from China. This would cause similar retaliatory measures by China, which could lead to a trade war. Trade disputes between the US and China, let alone a trade war, would be bad for stock markets.

Lookahead to next week 

The US Federal Reserve will announce its interest rate and policy statement on Tuesday. A positive outlook for the economy, or an announcement for further quantitative easing measures by Ben Bernanke would both have a positive impact on markets. 
Next week is heavy with housing data, with the housing market index on Monday, housing starts on Tuesday, existing home sales on Thursday and new home sales on Friday. Readers should keep in mind that US housing data have overwhelmingly been weak since the end of the recession, and that trend is unlikely to change. In addition, bad news from the euro zone, particularly from Ireland, is likely to continue next week.

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