Analysis

The market welcomed a very busy first week of October, with the widely-followed US Non-Farm Payroll data highlighting the week with renewed hope for the global economy.

The week was news-packed as expected. Aside from the regular economic data releases, several central banks made rate announcements and policy statements. Australia’s RBA slashed its cash rate by 25 basis points to 3.25 percent, while BOJ, BOE, and ECB kept their rates steady at 0.10 percent, 0.50 percent, and 0.75 percent, respectively. BOJ cut their economic assessment and announced nothing new in terms of monetary policy. In a press conference following the ECB rate decision, Mario Draghi reassured the market on Thursday that the ECB is prepared to purchase bonds of troubled Eurozone nations once necessary conditions are met.

The week ended with a surprising drop in the September US unemployment rate, falling below the 8 percent mark for the first time since February 2009. US jobless rate declined to 7.8 percent, while 114,000 jobs were reportedly added in the labor market.

Meanwhile, neighboring Canada’s September employment data reportedly increased more than five times that of expectations. According to Statistics Canada’s labor force increased by 52,100 in September, following a decent gain of 34,300 last August.

Stocks, Bonds, and Commodities

Market developments on Thursday and Friday dominated the bond and stock markets this week. German bonds and Spanish 10-year yields fell on Draghi’s comments. Canadian government bonds slid for the first time in three weeks, following the better-than-expected employment report. Asia, Europe, and the US stock markets all posted decent gains.

Meanwhile, the 50-stock gauge Nifty index in India made a surprising 16 percent drop in just eight seconds on Friday trading. The National Stock Exchange of India said the brokerage firm Emkay Financial Services mishandled orders which led to the substantial but fleeting drop in the index. Trading in the Nifty was halted for 15 minutes, while Indian Finance Minister Palaniappan Chidambaram promised they will investigate the stock drop. “I am assured that there is no systemic risk,” he told reporters.

For commodities, gold and silver reached their highest since November and March, respectively. Gold inched close to $1,800 on views that the stimulus measure from Japan, Europe, and US will continue to spark the interest in the yellow metal.

Currencies

Currencies were generally quiet for the first half of the week. EURUSD made most of its move on Thursday and Friday, gaining 263 pips and ending near the high of the week. In contrast, AUDUSD ended the week 180 pips lower, while GBPUSD was nearly unchanged.

The much-better-than-expected employment data out of Canada on Friday spurred a rare 60-pip drop in USDCAD in one hour. Other CAD crosses followed with much bigger moves. Given the economic disparity between US and Canada, USDCAD is poised to dive even further. A break of 0.9600 will increase likelihood of price heading towards the 0.9400 lows reached in mid-2011. USDCAD closed around 60 pips below its weekly open at 0.9783.

The Week Ahead

The market will have another busy week ahead, with particular focus on data such as Japan’s Current Account report to be released on Monday; US 10-year bond auction and Beige Book on Wednesday; Australia employment data, Canada Trade Balance, US Trade Balance and Unemployment Claims on Thursday; and US PPI and University of Michigan Consumer Sentiment on Friday. High-level talks also dot the entire week, including speeches from ECB’s Draghi, SNB Chairman Jordan, BOJ’s Shirakawa, US FOMC Members Tarullo, Yellen, Stein, and Lacker; as well as Eurogroup meetings on Monday, ECOFIN meetings on Tuesday, G7 meetings on Wednesday, and the IMF 3-day meeting starting on Thursday.

“The market is never a one-way street”, and this saying rings true for this week as the market euphoria fades, at least for now. After climbing for several weeks, reality has finally set in and the market seems ready to face the current economic issues again.

Slowing global economic growth was front and center, overshadowing the stimulus announcements of the US Fed and ECB in the previous weeks. Dovish minutes from the Reserve Bank of Australia, weak data from China, and surprise QE (Quantitative easing) from BOJ all furnished a risk-off view to the markets. Bank of Japan widened the asset purchase program from 45Tln Yen to 55Tln Yen and expressed that there is “a pause in Japan’s recovery due to overseas slowdown.” In Europe, Spanish Prime Minister Mariano Rajoy considered seeking external aid for the ailing nation after the ECB pledged to buy bonds in unlimited quantities.

Stocks, Bonds, and commodities

After rising to its strongest level since December 2007, S&P500 fell for the week, snapping a two-week rise. Commodity and financial stocks were most affected, as global growth concerns led investors to pare their holdings. S&P 500 fell 0.4 percent this week, but is currently 16% better for the entire 2012. Meanwhile, Dow Jones fell almost 14 points to 13,579.47. European stocks were little changed, and Asian stocks halted its two-week gain.

Treasuries recovered part of the losses it incurred last week when the US Fed declared more stimulus and low rates will remain until 2015. Treasuries climbed for the very first week this September as manufacturing data from New York and Philadelphia slowed, with the latter showing a fifth straight month of contraction. Weak PMI data for China and Eurozone manufacturing also aided the rise in Treasuries, as well as German bunds. For its part, Spanish bonds climbed on concerns the nation would look for international aid.

Gold held inside a tight $36 range for the entire week and closed nearly unchanged. Oil maintained a bullish tone on speculation central bank stimulus will help revive the slowing world economy.

Currencies

EURUSD started the week making a momentary breach of last week’s high, followed by a gradual 250-pip decline, ending near the weekly low at 1.2979. The market will be keeping a close watch of 1.2900 and 1.3000. 1.2918 was the low for this week.

For AUDUSD, the move down started earnestly from Monday, making a 190-pip decline, and closing down nearly 1% for the week. Meanwhile, GBPUSD bucked the trend and ended up nearly unchanged. GBPUSD climbed for a seventh week and to its best level in more than 12 months. GBP’s rise against EUR for the first time in about six weeks also contributed to GBPUSD’s resilience.

The Week Ahead

Unlike the previous weeks, next week is relatively light in terms of economic data. The market will look at Canada’s Retail Sales and GDP; Germany’s Ifo; New Zealand’s NBNZ Business Confidence; and Pending Home Sales, New Home Sales, and Unemployment Claims from the US. The market will also be keen to hear speeches of ECBs Draghi, SNB Chairman Jordan, and Bank of Canada’s Governor Carney.

Another milestone week for the markets as the US Federal Reserve pledged a follow through with stimulus measures to boost economic growth, further alleviating concerns of a downward spiral of the global economy.

The main Economic Event – The Federal Reserve Announcement

On Thursday, Federal Reserve Chairman Bernanke unveiled stimulus measures to help boost the US economy and combat the stubborn unemployment rate which continued to hover at the eight percent mark. In its third round of quantitative easing or QE3, the Fed pledged that it will boost its long-term bond holdings by purchasing around $40 billion worth of mortgage securities every month. It is worth noting that the Fed bought more than $2 trillion worth of bonds in the first two rounds of QE from late-2008 to mid-2011. ECB announced its own unlimited bond-buying plan last September 6.

Stocks

These recent developments prompted investors to move away from bonds and into stocks, commodities, and high-yielding currencies.

With a cemented risk-on sentiment, another green week ensued for the stock markets around the world.

In Asia, region-wide gains were led by more than two percent increase in the indices of Sri Lanka, Indonesia, India (Sensex and Nifty), Korea, Taiwan, and Hong Kong. Majority of the remaining indices inked more than one percent gains.

In Europe, the main indices of UK, Germany, France, Switzerland, Italy, and Spain were all up. Bucking the overall trend were a few indices, with top losers being the Egypt and Cyprus indices shedding a little over one percent and 4.70 percent, respectively. Like several beleaguered Eurozone nations, Cyprus is seeking international financial aid. Meanwhile, Egypt is experiencing civilian unrest sparked by a film that purportedly insults the Prophet Mohammad.

The main US indices of DJIA, S&P500, and Nasdaq posted healthy gains as well, with S&P500 boosted to its best level since 2007.

Commodities

On the commodities front, aluminum, lead, nickel, gold, oil, and platinum all posted strong gains. Oil rose to its highest in about four months, with talks of WTI crude breaching the $100 mark anytime soon. Aside from the risk-on sentiment, tensions in the Middle East, with reported demonstrations in Egypt, Tunisia, Iran, Sudan, and Yemen, are sparking oil supply concerns.

Currencies

The major currencies started the week slightly down before launching a four-day winning streak, particularly EURUSD, CHFUSD, GBPUSD, and AUDUSD. EURUSD and USDJPY ended up more than one percent higher, while EURJPY closed two percent better. EURUSD rose as high as 1.4 percent to 1.3168, a level last seen in May 4. Meanwhile, USDJPY made a Friday 90-pip bounce after sliding all week.

Next Week’s Projections

Moving forward, the market will be busy with key economic data and developments spread throughout the coming week. Investors will pay particular attention to Australia’s RBA policy meeting minutes, German ZEW economic sentiment data, Bank of England’s inflation letter, Japan’s BOJ press conference, and central bank member speeches from the ECB and Fed.

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.

Markets Reaction

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.

The month of August has left with a bang, with Friday ending with the week’s key event – the much-awaited speech by Federal Reserve Chairman Bernanke on Jackson Hole, Wyoming.

The Asian markets’ Friday close were mostly negative, with only the indices of Singapore, the Philippines, and Indonesia managing to end in positive territory. Japan’s Nikkei lost more than one percent, while the rest lost less than one percent. Notably, Nikkei ended the week down but it is up 1.7 percent for August, its best August performance in six years.

Bernanke’s 24-page speech revealed the Fed will continue its monetary policy accommodation to reduce US unemployment and spur economic growth. “The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” Bernanke told central bankers and economists in the annual economic-policy symposium in Jackson Hole.

Commodities, Stocks, Currencies react to Bernanke Speech

Commodities welcomed Bernanke’s remarks. Gold moved to its highest since April, while oil seized its biggest monthly gain in 11 months.

Bernanke’s speech also lifted equity investor sentiment. Dow Jones, S&P 500, Nasdaq, and all indices in Europe were positive with the exception of UK’s FTSE100.

On the currency front, EURUSD was one of the main beneficiaries of the risk-on effect of Bernanke’s remarks. The currency pair pierced through 1.2600 for the first time since early July, closing the week at 1.2577. Bulls need to contend with 1.2750 next; a substantial move above will create more steam for a push towards 1.2800, and perhaps 1.3000. On the downside, 1.2500 should hold as strong support to maintain the current bullish bias.

After a brief foray above 79.00, USDJPY has gone back to its tight 100-pip range which started in late July.

Meanwhile, GBPUSD is ending the month of August around 200 pips higher at 1.5863, after a brief breach of 1.5900. Economic data pointed to a deepening recession in the UK, bolstering speculation that BOE might need to prolong the use of monetary stimulus measures to prop up the ailing economy.

For its part, AUDUSD ended the month at a five-week low, closing at 1.0319. AUDUSD showed a relatively steady decline after touching 1.0600 in early August. Lingering concerns about slowdown in China, its largest trading partner, is putting pressure on the currency.

Friday’s data showed China’s manufacturing surprisingly contracted. Manufacturing orders dropped and output rise was at a much slower pace. This is the first time China’s manufacturing contracted in nine months. China’s economic activity is drastically affected by the unprecedented unemployment rate in the Eurozone and high jobless rate in the US.

The Week Ahead

Although the US will have its Labor day holiday on September 3, the week is fully packed and the market will focus on speeches of ECB’s Draghi and BOJ Governor Shirakawa; US ISM Manufacturing data; Employment and Unemployment data from Australia, US, and Canada; and interest rate decisions and statements of Reserve Bank of Australia, Bank of Canada, Bank of England, and European Central Bank.

As August draws to a close, the market has generally stayed upbeat this week, brought about by recent US and Europe developments.

Asian indices ended the week down with Japan’s Nikkei lower by more than one percent, down from Thursday’s three-month high and ending its two-week run.

Events Affecting the Financial Markets

Mid-week talks presented by St. Louis Fed President James Bullard and Chicago Fed President Charles Evans downplayed possibilities of propping up the US economy through another round of QE. Both Fed chiefs are policy nonvoters.

On the other hand, Fed Chairman Bernanke’s letter response to a US Congressional Committee inquiry displayed an opposing view. According to the letter, Bernanke sees “scope for further action by the Federal Reserve to ease financial conditions and strengthen recovery,” but “monetary policy is not a panacea, and policymakers in many different arenas should carefully examine steps they could take to foster a more vigorous recovery.” Wednesday’s Fed minutes indicated an active discussion of QE3 between the policymakers and consideration of a new round of bond buying “fairly soon.”

Bernanke’s response was well-received by the market: S&P 500, the Dow, and the Nasdaq all closed higher Friday. News of Spain’s negotiation for aid and speculation of ECB taking on yield band targets also helped global stock markets higher. Notwithstanding the upbeat sentiment, US main indices closed slightly down for the week, ending a string of consecutive weekly gains: six weeks for S&P 500 and Dow, and five weeks for Nasdaq.

Commidities

Following a seven-day rise to nearly 5-month high, gold clinches its best week since January on US stimulus hopes. Crude oil prices fell on Friday on a report that International Energy Agency chief has agreed to Strategic Petroleum Reserve release, shortly after dismissing the possibility for such an SPR release. Meanwhile, copper climbed one percent, reaching a one-month high on Thursday.

Forex

On the currency front, Euro had another week of gains. EURUSD reached a seven-week high, spurred by talk that Spain is under negotiations for international aid, and speculation that the European Central Bank was considering placement of yield level targets for its bond purchases. EURUSD hit a 1.2589 high on Thursday, a price last reached in early July. On the other hand, USDJPY closed 0.3 percent higher to 78.69 yen.

For the last week of August, the market is eagerly awaiting developments of the Federal Reserve annual meeting of central bankers at Jackson Hole, Wyoming. With a smattering of economic data, the focus is on central bankers Bernanke and Draghi with the week concluding with Bernanke’s speech on Friday.

After a lackluster week, the market has turned upbeat, with key talks and improved economic news helping end the week in good spirits.

Germany’s Angela Merkel supported ECB Draghi’s view to reduce borrowing costs and resolve Europe’s debt crisis. Meanwhile, US Federal Reserve hawkish central bankers raised expectations further of raising rates earlier than 2014. Positive US economic news also dampened expectations of further stimulus from the Fed.

US consumer sentiment reached a three-month high on early August, spurred by retail sales and low mortgage rates, University of Michigan consumer sentiment survey showed on Friday.

This US data along with the US Conference Board Leading Index capped the week in a good mood, sending stocks higher. S&P 500 stayed up for the sixth week and held at the four-year high. Europe’s leading shares reached 13-month high and extended to their longest weekly bull run in seven years.

Commodities were generally up, with gold and copper rising on upbeat US economic data and Merkel’s Europe-positive comments. Gold ended nearly unchanged while crude oil fell one percent on concerns about possible release of US strategic reserves.

Forex Markets

In the currencies front, Euro has turned higher across the board. EURUSD closed the week marginally higher at 1.2332, above the critical 1.2300 level. Next week, the market needs to gain a foothold of the 1.2400 to 1.2700 area if the bulls are serious in making an advancement. EURUSD has touched the 1.2300 area only three times in a month, while 1.2700 was last seen in late June. EURAUD closed 222 pips higher and closed at 1.1834.

USDCAD 0.9900 held for four days but finally broke on Wednesday, with price immediately dropping to its 0.9859 low, an area last visited in May. USDCAD ended the week a few pips below 0.9900. AUDUSD spent most of the week up with 162 pips, but there was a 117-pip pip dash down on Friday. GBPUSD, for its part, stayed confined in the upper part of the 1.5450 – 1.5770 range. Pound made an uncharacteristic 108 pip range throughout the week.

Meanwhile, after consolidating for 15 days, USDJPY made a rare five-day run, ending the week 141 pips to the upside, closing a few pips above 98.00 and just several pips below the week’s high. EURJPY followed the main Japanese pair’s move and soared 2 percent or 246 pips, reaching a six-week high. Dollar bullish sentiment including the brighter prospects in the European economy aided the Yen’s weakness this week.

Next Week Economic Calendar

Next week’s economic calendar is mildly busy with central bank speeches and meeting minutes from Australia, Japan, Canada, and the US evenly dispersed throughout the week. Germany’s Merkel is expected to meet French President Hollande by August 23 and Greek Prime Minister Antonis Samaras the following day. Merkel and Samaras are expected to talk about Greece and easing the country’s bailout conditions.