Sunday, November 7, 2010

North American markets rally on QE2

North American stock markets surged following US Federal Reserve Chairman Ben Bernanke's US$600 billion QE2 announcement on Wednesday. For the week, the Dow was up 2.93%, while the S&P 500 rose 3.99%. In fact, North American indices rose to their highest level since September 2008, when Lehman Brothers collapsed. In addition, the S&P 500 has gained about 16% since the beginning of September. 

Apart from QE2, markets also got a boost from Friday's October non-farm payroll, in which 151,000 jobs were gained. It was better than the 60,000 job gains expected. In addition, September private sector job additions were increased from the original 64,000 jobs to 107,000. September job gains were also revised from a previous loss of 95,000 jobs to a loss of 41,000.

Gold hits another record high

Following QE2, the price of gold hit another record high on Friday, reaching US$1,397.7/ounce. It had pulled back 5% from mid-October to November 2nd, after its previous record high of US$1,387. However, QE2 is pushing the US dollar lower, which increases the prices of all commodities, including gold. Oil was also strong, as Brent Crude rose to $88.11/barrel on Friday, its highest level since September 2008.

The week ahead

QE2 is having the effect on stock markets that Ben Bernanke intended, which is to lift stocks higher so that Americans are wealthier, and can spend more. The depreciating US dollar and continued access to cheap money should continue to lift markets, especially as we head into the traditionally strong holiday season of November and December.

However, it is important to note that North American markets are in overbought territory, making it susceptible to short-term pullbacks. The S&P 500, for example, is more than 2 standard deviations above its 50-day moving average. Nevertheless, I expect North American equities to be 10% higher than Friday's close sometime before the end of December. I am also raising my forecast on gold by $20/ounce, as I am now expecting gold to be US$1,450/ounce before 2011 begins.

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