World Week Ahead It's taper time

Monday 16th September 2013

After months of setting the stage, the US Federal Reserve is days away from starting to rein in the massive stimulus it has been providing to the world's biggest economy.

Fed policymakers will gather for a regular two-day meeting starting on Tuesday in Washington and ending a day later with Fed Chairman Ben Bernanke presiding at one of his most critical news conferences.

Bernanke has made it clear that as long as the US economic recovery continues to gain momentum it's time to pull back on the pace of buying bonds to keep interest rates low in a bid to bolster both consumer and business activity.

"The Fed already got tapering without actually tapering," Daniel Heckman, senior fixed income strategist at US Bank Wealth Management in Kansas City, Missouri, told Reuters.

The proof of that can be seen in the markets. The yield on the US 10-year Treasury note settled at 2.89 percent on Friday. Bonds rallied at the end of last week after data, including business inventories, slightly missed expectations. However, yields remain close to the two-year highs reached earlier this month.

Retail sales nudged 0.2 percent higher in August, the least in four months, the Commerce Department reported on Friday. The median forecast of economists surveyed by Bloomberg called for a 0.5 percent advance.

Separately, the Thomson Reuters/University of Michigan preliminary September index of consumer sentiment fell to 76.8 from 82.1 last month, which was the lowest since April. A Bloomberg survey estimated a reading of 82.

For the most part, equities have held their own, which market watchers say is a sign that they are well positioned for the Fed's decision.

On Friday, the Dow Jones industrial average gained 75.42 points, or 0.49 percent, to 15,376.06. The Standard & Poor's 500 Index added 4.57 points, or 0.27 percent, to 1,687.99. The Nasdaq Composite Index edged up 6.22 points, or 0.17 percent, at 3,722.18.

For the week, the Dow was 3 percent higher, the S&P 500 rose 2 percent and the Nasdaq increased 1.7 per cent.

It's not all about the Fed this week. On the economic front, there will be reports on industrial production, consumer prices, housing starts, building permits, sales of existing homes and leading indicators.

One positive for global investors is news that Russia and the US agreed on a plan to seize and destroy Syria's chemical weapons. President Barack Obama said he hoped the weapons deal would lead to a political settlement in Syria.

Gold suffered last week, posting a decline of more than 5 percent, and may extend its slide.

"As tensions with Syria cool down, the risk premium that had quickly pushed the gold market sharply higher is now being taken off very quickly," Sean McGillivray, head of asset allocation at Great Pacific Wealth Management, told Reuters.

Jeffrey Currie, the head of commodities research at Goldman Sachs Group, told Bloomberg that the metal may drop below US$1,000, below the bank's 2014 target of US$1,050.

In Europe on Friday, the Stoxx 600 was up 0.2 percent to 311.46 at the close in London. The benchmark gained 1.8 percent on the week.

In the coming days investors will eye reports on the euro-zone consumer price index, due Monday, euro-zone current account, ZEW sentiment as well as the trade balance, all due Tuesday, and euro-zone consumer confidence, due Friday.

BusinessDesk.co.nz

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