Equity markets in the US reversed losses seen earlier in the week after Federal Reserve Chairman Ben Bernanke made comments suggesting that an additional round of quantitative easing stimulus is still a viable option for supporting the sluggish growth rates that have been seen for a majority of this year.
The reversal is significant because leading into these comments, the S&P 500 was seen posting its first decline (on a weekly basis) in nearly two months. While the latest rally will not likely erase all of these earlier losses, it does bode well for stock market performance in the coming weeks as investors deal with prices pressuring yearly highs and stock valuations that have been criticized by analysts as being “inflated” and “over-extended.”
Supportive Central Bank Comments
Specifically, the Bernanke comments showed that the Federal Reserve sees “scope” for additional easing in monetary policy and this is helping to reassure investors that economic data will start to improve in the coming quarters. Trading volumes in most of the major markets (stocks, commodities, and currencies) remains relatively thin given that Summer has not yet finished, so it doesn’t take much in these types of situations to turn sentiment and send prices higher.
So, whether or not this short term positive momentum can continue will depend on the Federal Reserve’s willingness to maintain this stance and the next major indication of this will come at the central bank’s August 31st summit meeting in Jackson Hole, Wyoming, which is where monetary policy strategies are discussed in greater detail. Around this same time, we will also have a monetary policy meeting from the European Central Bank so, in effect, this “one-two punch” even risk could be what spurs the markets to its normal post-Summer trading activity.
Looking ahead, traders should remain watchful of any additional commentary from central bank members (voting members) as this will likely do more to guide markets than economic data in the next few weeks. It is currently an election season in the US so it remains to be seen if this latest commentary is simple lip service to keep markets supported or an actual indication of later policy decisions.
If the rhetoric continues in this vein, expect equity markets to benefit along with the Euro and Gold, while the US Dollar is sold-off on inflation expectations. Any indication that stimulus will not be needed, however, will likely lead to a major sell-off in the broader indexes.
My Trading Recommendation in 50 Words:
The latest price moves in Gold are starting to look very encouraging and I will be looking to enter into CALL positions on any dips in the metal. The first area to watch comes in at 1630 and I will enter into bullish positions here on a weekly time horizon.