Hopes of further economic stimulus helped benchmarks post gains once again on Friday. Not only did the U.S. Federal Reserve boost such hopes this time, the ECB is reportedly planning to set ‘yield band targets’ for its bond purchase plan. Volumes were at their second lowest on a full-day trading session this year. However, uncertainty over the US central banks’ possible third quantitative easing program (QE3) kept gains in check through the week and the benchmarks suffered a weekly loss.
It was a rare triple-digit gain for the Dow Jones Industrial Average (DJI) going by recent trends. The blue-chip index gained 100.51 points or 0.8% to close at 13,157.97. The Standard & Poor 500 (S&P 500) finished Friday’s trading session at 1,411.13, after jumping 0.7%. The tech-laden Nasdaq Composite Index added 0.5% and ended at 3,069.79. The fear-gauge CBOE Volatility Index (VIX) dropped 4.9% to settle at 15.18. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were a paltry 4.6 billion shares, sharply lower than the year-on-year average of 6.6 billion shares.
However, the day had not started on a bright note. Initially the benchmarks were trading in the red zone and the S&P 500 had dropped below the 1, 400 mark for the first time in two weeks. A report on durable orders sent out mixed signals. While the U.S. Department of Commerce reported a better-than-expected jump in new orders for manufactured durable goods; excluding transportation new orders showed signs of contraction. According to the report, new orders were up 4.2% to $230.7 billion in July, significantly outpacing consensus estimates of a rise of 2.5%. This was also the third consecutive month that new orders jumped. However, leaving out transportation, the new orders dropped 0.4%.
While benchmarks extended their stay in the red, extracts from a letter by the Fed Chairman helped reverse benchmarks’ direction. In a letter dated August 22, a response to queries by U.S. Congressman Darrell Issa (R - California), Chairman of the House Oversight and Government Reform Committee, Bernanke wrote: “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery”.
This revelation instantly sparked off positive sentiment. According to a report in The Wall Street Journal, in the letter Bernanke defends Fed’s actions and supports ‘Operation twist’ writing that is “working its way through the economic system”. Additionally, Bernanke wrote that the bond purchase plan "helped to promote a stronger recovery than otherwise would have occurred, and to forestall the possibility of a slide into deflation…by putting downward pressure on longer-term interest rates and contributing to broader easing in financial conditions”.
While investors were happy to read extracts from Bernanke’s letter that supported the Fed’s stimulus measures, another report from Reuters cited European Central Bank (ECB) taking further steps regarding its own economic measures. The report noted that ECB was planning to set a ‘yield band targets under a new bond-buying program’. A source confirmed to Reuters: “That is one of the options that is currently being discussed in the working groups and will then be handled by the Governing Council." “That is the most likely approach, and also the one that could be most successful,” the source added. However details of the yield band were scanty, but no decision is to be made ahead of the ECB meeting scheduled on September 6.
Interestingly both these events follow certain volatile developments. Starting with stimulus measures on the domestic front, on Wednesday, minutes from the Federal Reserve Open Market Committee noted: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery". These comments sparked off optimism and helped benchmarks recover from losses made earlier on Wednesday. However, the cheer faded when Thursday St. Louis Fed President James Bullard created uncertainty about additional economic stimulus arriving anytime soon saying that the present economic situation does not warrant the need for QE3.
As for the bond buy back measures of the ECB, last week, German Chancellor Angela Merkel said all efforts would be taken to help the European Central Bank tackle the region’s debt crisis. Merkel had said: “We feel committed to do everything we can in order to maintain the common currency”. However, this was followed by a contradictory view by Bundesbank, which opposed European Central Bank’s (ECB) idea of bond purchases.
Thus, with upheavals all through the week, markets’ gains were limited and indices eventually suffered weekly losses. The Dow, S&P 500 and the Nasdaq were down 0.7%, 0.5% and 0.2%, for the week. This also marked the first weekly losses for Dow and S&P 500 after a series of six weekly gains.
Coming back to Friday’s developments, the financial sector enjoyed decent gains. The Financial Select Sector SPDR (XLF) gained 0.5% and stocks including Citigroup Inc. (NYSE:C), Morgan Stanley (NYSE:MS), Goldman Sachs Group, Inc. (NYSE:GS), Wells Fargo & Company (NYSE:WFC), U.S. Bancorp (NYSE:USB), KeyCorp (NYSE:KEY) and Zions Bancorporation (NASDAQ:ZION) jumped 0.8%, 0.4%, 0.9%, 0.4%, 0.8%, 0.7% and 0.7%, respectively.