Weekly Market review - 27th August 2012

Federal Reserve Chairman Ben S. Bernanke said the central bank has the ability to take additional steps to boost the economy. Bernanke said in a letter dated Aug. 22 to California Republican Darrell Issa, the chairman of the House Oversight and Government Reform Committee, monetary policy “is not a panacea” and that other government policy makers should “examine” steps they could take to foster growth. He also said that the central bank will be “steadfast in its adherence” to promoting stable prices and maximum employment and that he is “confident” the Fed has the “tools to normalize the stance of policy at the appropriate time as the strength of the recovery improves.

China’s Premier Wen Jiabao urged extra measures to support exports and help meet economic targets as a decline in industrial companies’ profits added to evidence that the nation’s slowdown is deepening. On the other hand, Japan’s risk of an economic contraction this quarter has increased as faltering demand from Europe to China drags down exports, strengthening the case for more government measures to support growth.

Chancellor Angela Merkel told officials in her coalition calling for a Greek exit from the euro to “weigh their words,” as she signaled a renewed determination to keep the single currency intact. “Everybody should weigh their words very carefully,” Merkel told ARD yesterday in Berlin. The Greek government under Prime Minister Antonis Samaras is undertaking “serious efforts” to reduce its debt, she said, and reiterated Germany’s desire to stand by the country where the crisis originated. Euro leaders are preparing for a critical month in the three-year-old crisis that will involve the formulation of a European Central Bank bond-buying plan, a progress report by Greece’s international creditors and a looming German court decision on bailout funding on Sept. 12. Bundesbank President Jens Weidmann opened a new line of attack over the ECB’s plans, warning in Der Spiegel that monetary financing of budgets can “become addictive like a drug”, according to Bloomberg News.

EUR/USD: The EUR/USD fell on Friday to hover around the key level of 1.25000, as market sentiments were hit after Merkel has reinforced the point that Greece should not expect a significant bending of the terms in the original MoU that governed conditions for assistance. Chancellor Merkel said it was up to Greece to show that it could implement the austerity measures agreed with its international creditors, but reiterated that the country should stay in the euro zone. The pair was trading at 1.25069 at the time of writing, before a report today that may show German business confidence fell to a two-year low, adding to evidence Europe’s debt crisis is hurting the region’s economies. This week the pair is likely to register lots of volatility, on speculations on the European debt crisis and the possibility of Fed stimulus to boost the U.S economy. Economic events likely to contribute in the volatility of the EUR/USD are: Monday, a report on German business climate. Tuesday, Germany will release data on consumer climate. While, the U.S. will release a report on consumer confidence and industry data on house price inflation. Wednesday, Germany will release preliminary data on consumer price inflation, while, U.S. will produce revised data on second quarter gross domestic product, industry data on pending home sales, as well as official data on crude oil stockpiles and the Federal Reserve’s Beige Book. Thursday, German unemployment change. Separately, Italy will hold a ten-year government bond auction while the U.S will release official data on personal consumption expenditures and personal spending. Friday, the euro zone will publish preliminary data on consumer price inflation as well as official data on the unemployment rate throughout the single currency bloc. Germany will produce official data on retail sales. On the other hand, the U.S will release a report on Chicago’s purchasing managers’ index as well as revised data by the University of Michigan on consumer sentiment, as well as official data on factory orders. Federal Reserve Chairman Ben Bernanke will speak at the Jackson Hole Symposium; his comments will be closely watched for any indications on the future possible direction of monetary policy.

GBP/USD: The GBP/USD was trading lower at the 1.58069 at the time of writing, after UK House Prices fell 0.1 percent month-on-month in August and the U.K. economy contracted less than initially estimated in the second quarter on smaller declines in construction and production sectors. The data stressed concerns over the outlook for the U.K. economy and kept alive expectations for another round of quantitative easing by the Bank of England. On the other hand, the dollar came under broad selling pressure after Wednesday’s minutes of the Federal Reserve’s August meeting showed that many policymakers think additional easing may be warranted "fairly soon" unless there is evidence of a "substantial and sustainable" strengthening in the economic recovery. However, market sentiment was hit on Friday after German Chancellor Angela Merkel rejected Greek requests for an extension to its economic reform program, following talks with Greek Prime Minister Antonis Samaras on Friday. Speculations and market sentiments will continue to drive the market throughout the week. Economic events likely to affect the GBP and the market sentiments this week are; Monday, industry data on house price inflation. Thursday, the BoE is to publish a report on net lending to individuals, which is closely linked to consumer spending and Friday, a report on consumer confidence. Latest developments and news from the U.S and the Eurozone regarding the debt crisis will affect the trend of the pair.

OIL (WTI): Oil was trading higher at 97.090 as Tropical Storm Isaac reduced output in the Gulf of Mexico and a fire in Venezuela shut part of the world’s second-biggest refinery. Oil fell slightly Friday after German Chancellor Angela Merkel rejected Greek requests for an extension to its economic reform program, renewing concerns over a possible Greek exit from the region. However, support came from mounting expectations that the European Central Bank will implement policy measures to help stabilize the euro zone's sovereign debt markets at its next policy meeting in early September. Moreover, hopes of near-term easing in China and U.S supported the commodity. Elsewhere, renewed fears over escalating violence in Syria and lingering tensions between Iran and the West have also been supporting prices. In the coming week investors will be looking ahead to a speech by Federal Reserve Chairman Ben Bernanke at an annual symposium in Jackson Hole, Wyoming at the end of the week. The latest developments in the Eurozone regarding the debt crisis will also affect the trend of the commodity throughout the week.

Good Luck in trading….