August ended with a bang and September has so far continued with the fireworks and risk-on sentiment, amid speculation of more Federal Reserve stimulus and announcement of bond buying plan by the European Central Bank.
ECB to Purchase Government Bonds
European Central Bank's Mario Draghi told reporters at his monthly news conference at Frankfurt that the ECB is ready to purchase unlimited amounts of government bonds to help ailing European economies, while reiterating the need for participating countries to work under strict conditions. Draghi unveiled a new program, called Outright Monetary Transactions, or OMTs, which according to him “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”
US Labor Data
The US Labor Department data presented on Friday showed that the US economy had an increase of fewer-than-forecast 96,000 jobs in August, down from a revised 141,000 jobs gained in July. The report also showed that 368,000 Americans left the labor force and working-age population's share within the labor force has shrunk to its lowest since 1981. These worse-than expected figures spur speculation that the Federal Reserve will proceed with its stimulus measures or QE3.
Asian stock markets cheered Draghi's plans. Japan's Nikkei, Hong Kong's Hang Seng, and China's Shenzhen CSI were up more than two, three, and four percent respectively.
European stocks clinched its biggest weekly gain in three months, with all of the 18 western European indices climbing this week. UK’s FTSE rose 1.5 percent, Germany’s DAX climbed 3.5 percent, and France’s CAC climbed 3.1 percent. Notably, Spain's IBEX and Italy’s FTSE MIB rallied 6.2 and 6.7 percent, respectively. ECB's bond buying program is expected to significantly help in the liquidity issues surrounding Spain and Italy.
Standard & Poor’s 500 Index, Nasdaq, and Dow all closed higher for the week. S&P 500 reached its highest level since January 2008, while Dow made its highest close since late 2007.
Commodities like gold, oil, copper, and silver all closed the week higher.
Forex Markets Reaction
Draghi's speech made a significant impact on currencies as well.
Asian currencies closed higher for a third week, with Taiwan Dollar climbing to a two-month high and the Philippine Peso achieving its best week in nearly three months.
Major currencies started the week off drifting down, then stalling and reversing by mid-week, and eventually ended it off the highs.
EURUSD maintained its prominence and bullish tone, drifting on either side of 1.2500 for the first two days, after which it staged a 300-pip ascent towards 1.2800. EURUSD closed nearly one and a half percent at 1.2814.
AUDUSD made an equally impressive rally mid-week, and closed Friday nearly one percent higher at 1.0382. Meanwhile, GBPUSD charged 200 pips higher, closing above 1.6000, a price last seen in mid-May.
Next Week’s Forecast
For next week, the market will certainly keep a close eye mid-week on statements by the central banks of New Zealand (interest rate decision), Switzerland, and the US.