General

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.