In card playing parlance, drawing an ‘ace’ is usually a favorable turn of events and many stock market investors were hoping Mr. Bernanke would play an ace or two to address the weakening economic environment and as a result, the poor stock market performance this month. Instead, Mr. Bernanke’s much anticipated Jackson Hole speech was devoid of anything new as he reiterated what the Fed had announced as part of the FOMC statement from August 9th.
The Fed Chairman did argue, with a slightly political edge, that the current environment is in need of fiscal adjustment rather than monetary. He said the Fed still has tools to stimulate the economy but did not signal he will use them. However he did announce the next FOMC would be extended to two full days, possibly to debate their next stimulus move. Markets did gyrate following his comments, but in the end investors took his comments as a cue to pile back into U.S. equities nowtrading at the cheapest valuations since 2009.
The S&P500 had its first weekly gain since July 22nd finishing up about 4.5%. Apple shares rose despite Steve Jobs’ resignation as the tech giant CEO. The resource-heavy S&P/TSX also finished higher, but was hindered by the big pullback in the price of gold. Gold fell more than 10% at one point, but did close back above $1800/oz in very volatile trade. WTI oil prices moved mostly sideways as investors were encouraged by progress made against Gaddafi loyalists in Tripoli and the pending landfall of hurricane Irene. However, oil prices were held back by ever present concerns about slowing global growth finishing in the mid-eighties, up slightly on the week.
Third quarter earnings results from Canada’s banks have been mixed so far with positive surprises at BMO and National Bank offset by disappointing results at RBC. In other corporate news Sino-Forest returned to the headlines as the OSC suspended trading again citing material overstatement in their financials. The regulator went so far as to order the resignation of the CEO and four other executives. Realizing they overstepped their reach in forcing a resignation, the OSC sheepishly retracted their demands pending a hearing. Stay tuned.
The Trading Week Ahead
Those hoping that Fed Chairman Ben Bernanke would be preannouncing policy as he did when he telegraphed QE2 at Jackson Hole last year have now been disappointed. This week’s key data will either support or further refute his decision not to give intofurther stimulus at this point. In the U.S., the August ISM Manufacturing Index should record its first reading below the manufacturing sector’s breakeven ’50’ level since the economy emerged from the 2007-09 recession two years ago. Also, U.S. consumer confidence should plummet further in August, possibly shedding more than ten points on the month; a sign of recession about half of the time. Personal income and consumer spending should net out in favour of spending, helping to push the American savings rate down to 5.1% from 5.4%.
On the jobs front, August nonfarm payrolls should be satisfactory enough to suggest a recession has not yet started, but weak enough to keep markets from sounding the recessionary “all clear” signal. In Canada, the key economic release will show real GDP growth stalled in Q2, the poorest quarterly performance since the recession. Weakness in exports is at the heart of the slowdown.
Some of this was expected because of supply disruptions from the Japan disaster. But the shift in growth momentum in Q2 was more abrupt than previously thought. Add to that the increased US and European recession risks in Q3, and it means downside risks to Canadian growth and inflation. The silver lining is it may also means Bank of Canada rate hikes are off the table for the foreseeable future. The current account should be a precursor to the weak GDP report, widening because of the deteriorating merchandise trade balance.
Question of the Week
Does Warren Buffett’s purchase of Bank of America stock signal clearer skies ahead for U.S. Financials?
Buying $5 billion of Bank of America 6% preferred shares with 100% warrant coverage was a brilliant move on a bank trading at about half its book value. It does not mean that the dark clouds on the horizon are gone. Take a look at the relative performance of the BKX compared to the market. The banks have rallied but remain in a relative downtrend. You would have to see the relative downtrend broken and, ideally, a rally back above the relative support line for the all clear.
@David_RGMP