Weekly Wrap Up: What a difference a day makes: Bernanke’s comments spark knee-jerk reaction

Source: Henderson Global Investors

The week began well enough with the positive mood of Wall Street at Friday’s close spilling over into Asian markets on Monday. Other markets followed suit, but the enthusiasm petered out towards Wednesday in anticipation of the testimony to the US Congress by the Federal Reserve (Fed) chairman, Ben Bernanke. Markets were particularly interested in hints on the longevity of the quantitative easing programme. Although in his dovish testimony he said that the Fed would not prematurely scale back its asset purchase programme, in the Q&A session that followed he mentioned that this could begin within the next few Fed meetings if there is a sustained recovery in the economy.

Markets took their cue from the latter and risk assets fell. The most dramatic effect was felt in Tokyo where the Nikkei shed just over 7% the following day. Compounding the negative mood was the flash Chinese purchasing managers’ index (PMI) for May that contracted for the first time in seven months; fuelling concerns about the Chinese economy. By the end of the week, soothing comments from Fed officials managed to restore calm in the markets. This did not help commodities such as the bellwether metal, copper, which lost ground after touching a six-week high on concerns about the slowing pace of economic activity in China. Meanwhile gold found its safe haven status once again, up $24 on the week to $1,383 an ounce. Core government bond prices see-sawed over the week and in the foreign currency markets the Japanese yen and the Swiss franc found buyers.

In the US, consumer confidence data for May is in focus, given the Conference Board’s report and the final reading from the University of Michigan’s sentiment index (Friday). The US stock market rally, a greater sense of job security and signs of a recovery in the housing market will likely see both nudging higher. Meanwhile analysts widely predict that S&P/Case-Shiller’s home price index will have risen during March, helped by the lean inventory and historically low interest rates. Consensus also expects a 1.6% increase in pending home sales during May (Thursday). On the same day, the second release of US first quarter gross domestic product (GDP) growth is due, with little change forecast from the preliminary reading of 2.5% (quarter-on-quarter, annualised). Finally, manufacturing data will round things off on Friday: the Chicago’s purchasing managers’ index could return to expansionist territory in May.

Key releases scheduled in Europe include consumer price index inflation data in Germany (Wednesday) and the euro area as a whole (Friday). While price pressures are expected to have been relatively muted in May, a slight uptick could occur due to rising energy prices and the timing effect of the Easter holiday this year. The euro area economic sentiment indicator may show some signs of improvement, potentially helped by the recent European Central Bank (ECB) interest rate cut decision. In Asia, Friday will be dominated by Japanese data, which includes employment, inflation, and industrial production releases. Hopes are high that the new government’s policies – dubbed ‘Abenomics’ – will feed through to the real economy. Lastly, China’s official manufacturing PMI (Saturday) is expected to shrink on weak domestic demand.