Sunday, September 18, 2011

US markets rise as central banks take action

US markets rose on Friday, as investors gained confidence from the talks among five central banks. The S&P 500 rose 6.90 points or 0.57% to 1,216.01. The Dow gained 75.91 points or 0.66% at 11,509.09.

For the entire week, markets received a boost from the meeting of five central banks and euro zone finance ministers.  Markets also rose in anticipation of Bernanke's announcements on 20th and 21st.  For the week, the S&P 500 rose 5.4% after rising for five consecutive days, while the Dow gained 4.7%.

On Friday and Saturday, Timothy Geithner met with euro zone finance ministers in Poland. Geithner urged his euro zone counterparts to adopt a TALF-like measure, which the U.S. did during the financial crisis. However, they did not reach any agreements.

Italy rating in the spotlight

There was concern in the markets on Thursday that Moody's might downgrade Italy's rating. However, after markets closed on Friday, Moody's re-iterated its rating on Italy, but warned that it may be downgraded in the near future.

Five central banks act

On Thursday, five of the major central banks in the world announced an united effort to extend lending of US dollars to euro zone banks. The loans last for 3 months, and an auction will be held once a month from October to December. As a result, shares of French banks deemed to be facing a credit crunch, BNP Paribas, Credit Agricole and Societe Generale rose 16%, 10% and 9.3% respectively. The euro also rose against the US dollar, rising 0.49% to 1.3824.

Initial jobless rates disappoint

Once again, US initial jobless claims were worse than expected. On Thursday, the number rose 11,000 last week to 428,000. It was higher than the 411,000 that economists expected.

Euro bond proposal face German resistance

On Thursday, Jose Manuel Barroso stated that a euro zone bond proposal would be announced shortly. However, Germany has repeatedly stated that it was against such a move.

Moody's downgrades two French banks

On Wednesday, Moody's downgraded Societe Generale and Credit Agricole. It was because of their large exposure to Greek sovereign debt, which could cause the banks to face large losses. In addition, Moody's did not rule out the possibility of downgrading BNP Paribas. 
Italy asks China for help

On Tuesday, Italian officials stated that Italy's finance minister met with representatives from China Investment Company (CIC) last week. Italy asked China to purchase significant amounts of Italian government bonds, in exchange for allowing Chinese companies to invest in Italian utilities and energy companies.

Germany open to Greek default

On Monday, German finance minister Philipp Rosler wrote an article in a German newspaper stating that Europe should not treat a Greek default as taboo. To ensure the stability of the euro, he wrote that Greece should be allowed to default in an orderly manner in a worse case scenario.

Gold rises on Friday

After falling earlier in the week, gold rose 1% on Friday on a gloomy economic outlook by US consumers. Gold futures rose $33.30 to settle at $1,814.70/ounce.

Looking ahead to next week

While the S&P 500 posted a remarkable 5%+ rally this week, much of the problems troubling markets in recent weeks still remain. The EU and IMF have yet to approve the next $8 billion in bailout funding for Greece. In addition, Greek CDS still indicate a 90% of chance of default. Meanwhile, despite a push for a euro bond, Germany remains unwilling to accept such a measure. With Angela Merkel's approval ratings at a low level, Germany's stance is unlikely to change.

In the US, initial jobless rates continue to be worse than expected. This raises the possibility that the next monthly employment report will indicate a rise in the unemployment rate.

Markets will be paying close attention to Ben Bernanke, as the Fed meets on the 20th and 21st. While Ben Bernanke is well-known to be a dove on interest rates, there are few measures left that he can implement. The relatively high inflation in the US will also make it difficult for him to take drastic measures. Having already promised ultra-low interest rates until mid-2013, he can purchase long-dated US Treasuries and/or lower the interest rate from 0-0.25% to 0-0.1%. If he takes less action than markets expect, US stocks will likely sell off.

While gold suffered a 2.5% fall this week because of a strengthening US dollar, I see that as a temporary pull-back.  With the euro zone debt crisis far from resolved, gold will likely head higher in the coming weeks.  In addition, Ben Bernanke's actions are positive for gold regardless of what he chooses to do.  If he conducts a significant QE3 measure, gold would rise on the availability of cheap money (as it did during QE1 and QE2).  If Bernanke takes little action, gold would rise on fear of a double-dip recession.

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