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Markets cheer US, Europe Developments; Jackson Hole meeting eyed

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.

Markets Soar on Better Economic Prospects

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.

S&P 500 Soared, the EUR Lost Against the USD & Yen while the Summer tames Markets Volatility

After several weeks of unprecedented volatility, it was a completely different picture this week as the market was relatively flat. Extraordinary market moving news in the form of surprise speeches and announcements from prominent leaders were lacking, leading the market to focus on lingering issues and daily economic releases.

Italian and Spanish Italian two-year notes dropped for the first time in three weeks on concerns ECB will cap borrowing costs of these two nations. Fitch affirmed Germany’s AAA rating and said outlook is stable. US Treasuries rose and commodities fell as data from China and France cemented signs the world economy is weakening and led investors to seek safer assets.

S&P 500 soared for a sixth day, closing above 1,400, its highest level since early April. This is the longest rally for the index since 2010, amid speculation that the US Federal Reserve will provide further economic stimulus. Boston Fed’s Rosengren renewed his call for QE as he sees “the second half of the year won’t be much better.” Meanwhile, San Francisco Fed chief John Williams has recently joined calls for QE and is now in favor of a third round of quantitative easing or QE3. Williams said lingering issues of high unemployment rate and slow economic recovery led to this turnaround in his decision.

Currency markets were generally timid this week but Monday started off with EURCHF allegedly having another ‘fat finger’ incident, spiking briefly to 1.2092 from the 1.2000 lows. A few days later, Reuters said the spike was caused by an RBS algo error.

Euro posted a weekly loss against the US Dollar and Yen. EURUSD spent two days near last week’s 1.2404 highs and breached it briefly. From there, it gradually drifted down, erasing most of last week’s gain and ending below 1.2300. AUDUSD spent the whole week ranging between 1.0500 and 1.0600, with brief forays beyond these areas. Reserve Bank of Australia left its rate unchanged on Tuesday. For EURGBP, a lackluster two-day up move was followed by a persistent down move, ending the week near its lows and just 40 pips away from last week’s 0.7790 lows. Meanwhile, USDJPY grinded a 60-pip range all week long, lacking the vitality to reach 79.00 and has continued gravitate towards 78.00 since late July. USDCAD rallied amid speculation that global growth will maintain demand for oil, Canada’s main export. USDCAD closed the week a few pips above 0.9900.

For the coming week, the market is expected to focus on Britain’s MPC Minutes, BOE Inflation Letter, and Germany’s ZEW Economic Sentiment. Volatility can also come from Retails Sales, Unemployment and Inflation reports from Britain and the US. The week will be capped off by Canada’s Retail Sales and University of Michigan Consumer Sentiment from the US.

Key Developments Spur the Market Higher

The crazy month of July has ended and August started on a high note as markets ended the week with uplifted spirits. Key central bank meetings and developments maintained the volatility for this week.

European Central Bank (ECB) President Mario Draghi stayed prominent this week and made an indication that the ECB will work with the governments to buy a considerable amount of bonds to help abate Eurozone’s debt crisis.

On Friday, the US Labor Department reported that the US economy produced 163,000 non-farm jobs in July, a number much higher than economists expected. While this bodes well for the US economy, it is important to note that the country needs 11.7 million jobs created to reach the US pre-recession employment level.

The markets cheered for the developments. Stocks soared, sending S&P500 climbing to its highest level since May. European stock markets, particularly Italy & Spain were up around 6%. Oil and gold were also up.

On the currency front, the major currencies started slow and stayed relatively quiet during the first half of the week, and volatility only got invoked from Wednesday onwards. Euro continued to perform well.

EURUSD was sloppy during the start of the week, but jolted up and then down 260 pips in both directions ending about 20 pips from the week’s high and the 1.2400 mark. This is a significant move as EURUSD has only been able to close above 1.2300 on two occasions in about a month. Staying above 1.2300 will cement the changing sentiment and give bulls enthusiasm to forge a move higher. Meanwhile, GBPUSD retraced nearly all of last week’s 300-pip upmove, but eventually ended the week range bound above 1.5600. With the risk on sentiment and jolly mood of the markets on Friday, AUDUSD mirrored EURUSD and ended at the week’s high.

For the coming week, the market will be looking at the Reserve Bank of Australia rate decision, Bank of England’s Inflation report, European Central Banks Monthly Report, and employment reports out of Australia and Canada.

Are we seeing heightened volatility or a new trend emerging in the currency front? We will surely find out in the coming weeks.

Volatile Markets React to European Dramatic Events

After relentless pressures on all fronts, stocks, bonds, Europe, and the Euro expressed a huge sigh of relief this week. Volatility prevailed as was expected and risk-on sentiment continued.

The market started the week with its familiar bearish sentiment but turned on a dime mid-week as ECB President Mario Draghi declared that the ECB was prepared to do “whatever it takes” to preserve the Euro. The following day, German Chancellor Angela Merkel, who is on vacation, after speaking on the phone with French President Francois Hollande issued a joint statement where they expressed that “France and Germany are fundamentally attached to the integrity of the euro zone” and “are determined to do everything to protect it.”

The markets assimilated their statements well and ended the week with strong gains: European stocks rose for an eighth week; US stocks rallied with S&P posting 2% gains on Friday (the longest rally since March), Dow Jones achieved a three-week rally (the longest since January); Spain, Italy and US Treasuries fell; and oil reached back above the $90 level.

On the currency front, Euro made a strong comeback after reaching multi-year lows against several currencies. Aptly called by some as ‘Super Mario Draghi’ (from the console and computer game Super Mario Brothers), his comments and the Merkel-Hollande joint statement unleashed a flurry of stop loss runs. Euro bears took cover as the bulls came in droves.

EURUSD like several currency pairs gapped down to start the week, opened at 1.2119 and wobbled down to reach its lowest since June 2010, before posting an impressive comeback (nearly 400-pip gain from the weekly low in three days).

The other majors piggybacked on the revitalized risk-on sentiment. GBPUSD, AUDUSD, USDJPY were all up on Friday, with USDJPY ending the week effectively unchanged. AUDUSD started the week retracing and even breaching last week’s low, but when the uptrend became resurrected mid-week, the pair turned a full 360 degrees and ended the week at a new high (highest since April 2012). Meanwhile, EURAUD on late Friday posted a 99-pip upmove in the Europe session which was quickly erased by a 122 pip drop in the last 4 hours of the week’s trading. This gave EURAUD a weekly close just 49 pips higher than Monday’s open despite making 100-pip up and down swings the entire week.

Going forward, events next week and beyond are bound to keep the volatility high. Draghi and Bundesbank President Jens Weidmann will talk about rescue measures to further deal with the region’s crisis. A separate closed door meeting between US Treasury Secretary Tim Geithner and two European leaders, German Finance Minister Wolfgang Schaeuble and Draghi, will take place on July 30. On August 1, the Federal Reserve is expected to talk about possible additional measures to prop up the US economy, while the US Labor Department will issue the monthly jobs report on August 3. Finally, BOE and ECB will also meet next week, while BOJ meets on August 9.

Euro Touches Multi-Year lows vs Majors as Crisis Deepens

The Forex market centered on Europe again, bashing the Euro down against the majors as risk-on sentiment prevailed throughout the week.

Numerous headlines contributed to Euro’s decline culminating on Friday.

The week started with Moody’s downgrade of 13 Italian banks, following its downgrade of the Italian government’s credit profile during the prior week.

After the German lower house deliberation and eventual approval of granting financial aid to Spain, the Eurogroup ministers pushed through with a consensus on Friday, approving the Spanish bailout. Ministers agree that “providing a loan to Spain for the purpose of the recapitalization of financial institutions is warranted to safeguard financial stability in the euro area as a whole.”

For its part, Egan-Jones cut Spain’s rating on Friday for the sixth time since mid-April, from CCC+ to CC+, putting more pressure on the country’s credit rating and pushing it further near junk territory. Spain could eventually be rated at C and the probability of the country defaulting on 2013 is 35%, adds Egan-Jones. Spain also cut its 2013 economic forecast on Friday.

Meanwhile, the eastern Spanish region of Valencia said early Friday that it would need help from the government to refinance its burgeoning debt. This news pushed yields on 10-year Spanish bonds back above 7% and the Spanish stock market index IBEX went sharply lower.

As a sign of growing discontent on the ongoing issues, hundreds of thousands took to the streets on Thursday evening, after more than a week of public protests. Unemployment rate in the country is above a whopping 24%.

Continuous downward pressure hurt the Euro, forcing it to print multi-year lows against several currencies, including USD, GBP, JPY, and AUD. EURUSD spent most part of the week making 100-pip swings as traders made positional adjustments during and after Fed Chairman Bernanke’s two-day testimony on the US Senate. EURUSD ended the week lower, dropping to 1.2144, its lowest since June 2010. 1.1876 is the 2010 low. In other EUR crosses, EURJPY hit 95.36 Friday, its lowest since November 2000.

The other majors followed the week’s volatility, but were less affected compared to the EUR crosses. AUDUSD made a relatively steady march upward to end the week above 1.0400. AUD was one of the major beneficiaries of Euro’s decline, as global investors go in search of yield from safe currencies.

Among the EUR crosses, EURAUD was the main mover posting a 12% drop. EURGBP made a 1.3% drop (reaching the lowest level since October 2008), while EURJPY ended with a 1.9% drop, reaching the lowest level since November 2000.

EURCHF stayed in a lackluster 5-pip range all week, except for a blip up-move towards 1.2014. In contrast, other CHF crosses trod higher with AUDCHF gaining more than 2%.

It seems far from over so expect more volatility in the coming weeks.

Eurozone Crisis: Bank Bailout Deal Reached

After 13 hours of tension and debate, Eurozone leaders have reached an agreement in the two-day summit in Brussels on early Friday.

Germany’s Angela Merkel yielded to the demands of Italy and Spain for immediate Eurozone aid in bringing down the two countries’ soaring borrowing costs. European leaders agreed on creating a bailout package for Eurozone’s teetering banks.

Under the new agreement, the European Financial Stability Facility (EFSF) will provide assistance guided by the current rules. EFSF is a provisional program and a precursor to the European Stability Mechanism (ESM), a new institution set to be founded in Luxembourg and expected to begin operating this July.

Ratings agency Fitch sees the two-day summit as having exceeded expectations, saying “[it] marks a positive step that eases near-term pressure on Eurozone sovereign ratings. Eurozone leaders’ decision to create a ‘single supervisory mechanism’ for banks is an important step towards ensuring the long-run viability of the euro. Once such a mechanism has been created, the soon to be established ESM could recapitalize banks directly. In Fitch’s opinion, the creation of a single pan-Eurozone bank supervisor with the power to intervene and, if necessary, directly capitalize banks could greatly improve the functioning of Economic and Monetary Union (EMU).” Furthermore, Fitch warned that the risks in implementing the agreement successfully will be high, and the resolution of the current Eurozone debt crisis will take a long time.

Leaders have expressed relief and celebration over the agreement. European Council President Herman Van Rompuy called the agreement a “breakthrough,” while Italian Prime Minister Mario Monti touted the agreement as a “double satisfaction for Italy,” following the defeat of Germany in the semi-finals of the 2012 UEFA European Football Championship.

Asian and European stock markets soared after the deal was reached. Euro climbed more than one percent against the dollar, while the Australian dollar hit a one-week high. US stocks soared in early trading.