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
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:
), Morgan Stanley (NYSE:
), Goldman Sachs Group, Inc. (NYSE:
), Wells Fargo & Company (NYSE:
), U.S. Bancorp (NYSE:
), KeyCorp (NYSE:
) and Zions Bancorporation (NASDAQ:
) jumped 0.8%, 0.4%, 0.9%, 0.4%, 0.8%, 0.7% and 0.7%,
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