First, the stock markets recorded the new high after Bernanke’s speech. The S&P500 futures went up to 1070,5 points, marking another high of the year, and moving closer to “pre-Lehman” levels. Even if the short term outlook for the stock indices is somewhat bearish (see chart), fundamental background is unquestionably solid and seems to justify a return to prices noticed in the summer of 2008. While Bernanke’s acknowledgment was positive for the market, potential tightening moves by the Fed are not necessarily so. If the Fed is going to tighten monetary policy, the stock market bulls will want to see even more stellar data.
More important implications may refer to major currency rates, especially EURUSD. The pair buoyed by the stock market, shot up in early September to as high as 1,4767. This is higher than a local maximum of 1,4723 from December 2008 but the market clearly lost the momentum around this important technical level. A continuation of the bullish trend on the pair beyond those resistances means a broad spectrum for further advances, even to the last year’s (historical) maximums. Actions taken by the Fed may be decisive for this scenario. If the Fed stays put and waits with tightening measures for too long, the pair is free to move up, especially if the stock markets go in the same direction. However, a change in the Fed’s stance may encourage the markets to use those local highs on the pair to rethink a 7-month trend. This equation includes also actions taken by the ECB, and it is assumed that the bank keeps its policy unchanged for a while.
The impact on commodities will be the mixture of the two. If both stock markets and the EURUSD continue their trends up, the impacts on the major commodities markets will be clearly positive. Gold may be especially sensitive to the EURUSD as it eyes last year’s maximum of 1032 USD.
The first step in any tightening will be a change in communiqué. Until recently Bernanke maintained that the central bank is interested in keeping market interest rates low. With “the recession very likely ended” has he changed his mind? Especially a change in a phrase: “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period” would have potentially serious consequences.
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Przemysław Kwiecień  |
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