Market Comment 4 September 2012

Markets performed broadly in line with expectations over the past week, marking their recent gains ahead of the key speech delivered on Friday by Ben Bernanke of the FOMC. That speech essentially met expectations, significantly increasing the probability of further monetary expansion from the central bank. Commodities responded, with gold and oil rising on the week.

The outstanding issue is timing. As much as Bernanke stimulated confidence in further easing, he didn’t guide on when to expect it. With the US elections looming, the timing issue remains complex.

This week we move onto the next act in the central banking chapter, with the ECB meeting on Thursday to decide on rates. There is a chance of a rate cut, which could reverse some of the euro’s recent gains. But, the main focus will be on what Mario Draghi has to say about plans to intervene with scale in peripheral bond markets. Such an outcome, whilst expected, would likely encourage markets to rally further.

Behind the scenes, of course, all is not rosy. Markets slipped ahead of Bernanke’s speech, on uncertainty as to its outcome and amid economic weakness, especially in Europe. Russia too edged back on global risk aversion, despite the resilience of oil prices, although such a divergence is unlikely to sustain. Russian growth rates have lightened in the summer, but remain healthy on a global comparison.

In the developed world, central bank manoeuvres can bring ease to financial markets, so we are looking for tactical gains. But, the longer-term economic problems will continue to heal slowly at best.