Market treads water as US holds breath

Local market fails to recoup last week's $36 billion fall ahead of speech from Federal Reserve.

By InvestSMART · 27 Aug 2011

By InvestSMART ·
27 Aug 2011

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Local market fails to recoup last week's $36 billion fall ahead of speech from Federal Reserve.

AUSTRALIA'S sharemarket this week failed to recoup last week's $36 billion fall, with stocks losing their pulse ahead of a key speech from Federal Reserve chairman Ben Bernanke.

The S&P/ASX 200 Index finished slightly in the red yesterday, falling 12.8 points, or 0.3 per cent, to 4200. Trading was mostly flat this week after the market shed 149.3 points or about $36 billion on Friday last week.

Mr Bernanke was set to speak last night at a central bank conference in Jackson Hole, Wyoming, where last year he hinted at the launch of QE2 - the Fed's $US600 million bond-buying program to kick-start a faltering economy. Weak housing and factory activity figures revealed this week that the US recovery was far from gaining traction.

But investors were not betting that Mr Bernanke would unveil another round of quantitative easing or QE3, or use any tools in the Fed's depleted armoury to head off a recession in the world's biggest economy. The gloomy outlook was reflected on Wall Street on Thursday night, with the Dow Jones Industrial Average shedding 170.89 points, or 1.5 per cent, to 11,149.82, and the broader S&P 500 Index falling 18.33 points, or 1.6 per cent, to 1159.27.

Gold, regarded as a haven from falling markets and currencies in trouble, rose $US26.80 to $US1772.50 an ounce.

AMP chief economist Shane Oliver said he expected Mr Bernanke's speech to be a ''non-event''.

''Bernanke will probably say we are expecting growth to pick up a little bit in the second half of this year and inflation today is higher than it was a year ago than when we announced QE2, therefore we are better off waiting to see how things turn out.

''By the same token he'll say the US economy has come in a lot weaker than expected and that the Fed stands ready to implement a whole range of options, including QE3 if need be.''

CommSec chief economist Craig James said ''nobody is wanting to get too far ahead of themselves'' while uncertainty clouded world markets.

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Frequently Asked Questions about this Article…

Why did the Australian sharemarket fail to recoup last week's $36 billion fall?

The Australian sharemarket remained cautious and largely flat as investors awaited a key speech from Federal Reserve chairman Ben Bernanke. After shedding about $36 billion (a 149.3-point drop) the previous Friday, the market only slipped further on the S&P/ASX 200 and was weighed down by weak US housing and factory data that reinforced a gloomy global outlook.

What happened to the S&P/ASX 200 this week and what were the index numbers?

The S&P/ASX 200 finished slightly in the red, down 12.8 points or 0.3% to 4200. Trading was mostly flat across the week after the market had earlier lost 149.3 points (about $36 billion) on the previous Friday.

Why were investors focused on Ben Bernanke's Jackson Hole speech and what was at stake?

Investors were watching Bernanke's Jackson Hole speech because last year he hinted at QE2, and markets were looking for signals about whether the Fed might use further tools — including another round of quantitative easing — to support the US recovery. The economy's weak housing and factory figures made the speech especially significant for global market sentiment.

Were investors expecting the Fed to announce QE3 at that speech?

No — the article says investors were not betting Bernanke would unveil another round of quantitative easing (QE3). While the Fed was seen as ready to use a range of options if needed, markets appeared to treat the speech as unlikely to deliver immediate new stimulus.

How did US markets perform ahead of the Fed speech and what were the key US index moves?

Wall Street fell ahead of the speech: the Dow Jones Industrial Average dropped 170.89 points (about 1.5%) to 11,149.82, and the broader S&P 500 fell 18.33 points (about 1.6%) to 1,159.27, reflecting the gloomy global outlook.

What happened to the gold price during this period and why might investors care?

Gold rose by US$26.80 to US$1,772.50 an ounce. The article notes gold is often regarded as a haven when markets are falling or currencies are under pressure, which is why everyday investors often watch gold prices during periods of market uncertainty.

What did AMP chief economist Shane Oliver say about Bernanke's expected message?

AMP chief economist Shane Oliver expected Bernanke's speech to be a 'non-event.' He suggested Bernanke would likely say growth should pick up a little in the second half of the year and that inflation is higher now than when QE2 was announced, but that the Fed stands ready to implement a range of options — including QE3 if needed.

How did CommSec describe investor behaviour amid the market uncertainty?

CommSec chief economist Craig James said 'nobody is wanting to get too far ahead of themselves' as uncertainty clouded world markets, indicating many investors were staying cautious rather than making big moves.