Market treads water as US holds breath

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.

By InvestSMART · 27 Aug 2011

By InvestSMART ·
27 Aug 2011

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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…

What happened to the ASX 200 this week and how big was last week's fall?

This week Australia's sharemarket finished largely flat, with the S&P/ASX 200 slipping 12.8 points (about 0.3%) to finish at 4200. That followed a sharp drop the previous Friday when the market shed 149.3 points — roughly a A$36 billion decline.

Why were markets cautious ahead of Federal Reserve chairman Ben Bernanke's Jackson Hole speech?

Investors were treading water ahead of Bernanke's Jackson Hole address because markets were waiting for any signal on US policy. Weak US housing and factory activity figures had already raised concerns about the recovery, so traders were reluctant to make big moves before hearing whether the Fed would signal more stimulus.

Were investors expecting the Fed to announce QE3 after Bernanke's speech?

No — most investors were not betting that Bernanke would unveil another round of quantitative easing (QE3). AMP chief economist Shane Oliver described the speech as likely a "non-event," noting the Fed would probably wait to see how growth and inflation evolve, though he added the Fed stands ready to consider options including QE3 if needed.

How did Wall Street react around the same time?

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

Did gold move during this period and what does that mean for investors?

Yes. Gold rose US$26.80 to US$1,772.50 an ounce. The article notes gold is often seen as a safe-haven asset when markets and currencies are under pressure, which helps explain the uptick amid uncertainty.

What are economists saying about near-term US growth and inflation?

AMP chief economist Shane Oliver expected Bernanke to say growth should pick up a little in the second half of the year and that inflation is higher than a year ago — which suggests the Fed might prefer to wait before acting. At the same time Oliver acknowledged the US economy has come in weaker than expected and the Fed stands ready to use a range of options, including QE3, if necessary.

How are everyday investors reacting to the current market uncertainty?

According to CommSec chief economist Craig James, many investors are being cautious and "not wanting to get too far ahead of themselves" while uncertainty clouds world markets. That caution was reflected in relatively flat trading and muted activity this week.

What market indicators should retail investors watch after this week’s activity?

Based on the article, keep an eye on upcoming US data (especially housing and factory activity), comments and speeches from the Federal Reserve (like Bernanke's Jackson Hole address), and safe-haven flows such as gold prices. These factors were driving sentiment and market moves during the week covered in the article.