The last seven days have seen the financial markets dominated by two key items of fundamental news. The first from Fed Chairman Ben Bernanke in his annual statement from Jackson Hole, and the second from Mario Draghi, president of the European Central Bank who unveiled yet another Eurozone rescue plan. Both were pivotal for different reasons but ultimately had the same effect on the markets in general which saw risk on appetite return with a vengance as the dollar weakened, the euro strengthened as investors returned from the summer recess to buy risk assets once again. So what are the long term effects of these two events?
Last Friday’s statement from Ben Bernanke finally gave the hint that the markets had been waiting for, that the Federal Reserve was ‘ready to pull the trigger’ on a further round of quantatitive easing, with the financial markets taking this as a clear signal, that QE3 was ready to launch. Indeed following the appalling NFP figures on Friday which failed to break the 100,000 level, added further weight to the inevitability of a further round of stimulus in a desperate attempt to kick start the US economy into life. The generally accepted view is that 500,000 new jobs per month is the minimum required to drag the world’s largest economy out recession and away from a chronic and damaging depression. What is comical is to see that with such a pitiful number, the headline unemployment rate actually fell. Who says statistics don’t lie! The true unemployment rate is nearer 20% but that’s another story.
The importance of QE3 cannot be underestimated by investors and speculators, since it’s impact is already being clearly seen on the dollar index, a chart which shows the strength or weakness of the US dollar against a basket of other currencies. As we can see on the daily chart, the US dollar has been weakening over the last two weeks, and has now broken below a key support level in the 83 region, and is now testing the 80 price level once again following a plunge lower on Friday, with the December futures dollar index closing the week at 80.235. The move lower has been given further impetus with heavy and increasing selling volume on both the daily and the three day chart, and now looks set to move deeper, driven by the impending QE3 implementation by the Federal Reserve. This US dollar weakness will have two significant effects. First, commodities will rise, with gold, silver and other primary commodities leading the way. Second, we should see a surge in equities as investors take advantage of the weak US dollar.
So that was the FED – what of Europe? Thursday saw ECB president Mario Draghi release details of his much vaunted plan, which one commentator suggested was more of a ‘pea shooter’ rather than the suggested bazooka! The plan in simple terms is that the ECB will instate an unlimited shor term bond buying program for Eurozone countries that request help, and has been designed to ease the pressure on Spain and Italy, both of whom now threaten to dwarf the problems of Greece. The problem of course is not the PIGS ( Portugal, Italy, Greece or Spain) but Germany – Germany is not backing the plan as Angela Merkel and the Central Bank fears that this could damage the euro irrevocably.
Moving to the markets in general the 10 month Treasury yield rose to 1.637% following the ECB statemetn on the belief that the ECB will increase it’s bond buying program, with the 30 year bond rising to 2.772%. In the UK the Bank of England confirmed its decision to keep interest rates low at 0.5% and also waiting, like the Fed, to release a further round of quantitative easing.
In the energy markets, Natural gas supplies rose 28 billion cubic feet to over 3.4 trillion cubic feet, which were well below forecast. Crude oil stockpiles at Cushing declined 7.4 million barrels to 357 million barrels, exceeding estimates at 5 million barrels. The December WTI oil contract is now trading in the $96 per barrel region on the daily chart, with further declines in the US dollar we should see oil push towards the $100 per barrel level in due course where strong price resistance awaits.
In the metals market, we have seen strong gains for both gold and silver, following an extended period of sideways consolidation over the summer months, and both now look set to develop bullish trends in over the next few weeks. The platforms of price support now in place for both metals, should give the springboard to propel them both higher, with silver set to test the $40 per ounce level and gold to test the $1800 per ounce region in due course.
Finally moving to soft commodities, soy bean has been the star performer over the last few weeks, developing a strong bullish trend and following this week’s crop performance report, this trend looks set to continue.
By Anna Coulling