The FX, equity, and bond markets were presented with a surprise decision by the FOMC last week, sending the investors to seek safety for their assets. The Federal Reserve of the United States decided to keep the quantitative easing program unchanged at $85bn worth of purchases a month, while the market already priced in a cut on those purchases by $10-15bn. The decision by the Fed sent the US Dollar to drop against all major counter parts, adding even more pressure on the greenback following the withdrawal of Former Treasury Secretary, Larry Summers, from the race for Bernanke’s seat, leaving more room for dovish Vice President Janet Yellen. Major world indexes rallied following the decision, the S&P surged by 1.60%, the Dow gained 1.55%, and the Nikkei by 1.80%. The Fed decided against the tapering of the asset purchases, citing that the Fed should “wait for more evidence that progress will be sustained before adjusting the pace of purchases”. Although the job market has shown signs of improvement, policymakers believed that the outlook has remained uncertain and they were concerned that premature tightening would lead to slowdown of the economic recovery.
Anticipation ahead of the Feds’ decision weighed on the FX markets. The Euro started the week on a positive note, opening at 1.3294, and rising at the early hours of the trading day to 1.3380 after US President Barrack Obama, said that Former Treasury Secretary, Lawrence Summers, has withdrawn from the race of the Federal Reserve Chairman position. Due to Summers’ bullish stance on the economy, the USD dropped against the EUR, as the more bearish member, Fed Vice President Janet Yellen, was left with no competition for the seat. The single currency range traded towards mid-week, in anticipation of the Fed’s tapering decision. The Euro surged significantly against a weaker US Dollar, as the Fed took the market by surprised, by holding the pace of purchases at $85bn. The Euro surged 230 basis points against the US Dollar, to a touch high of 1.3568. The Euro eased only slightly following the “Fed Surprise” rally, falling to 1.3508 on Friday. The Single currency closed the week at 1.3524. The British Pound followed suit, opening at 1.5880 on Monday, and rising to 1.5963, following Larry Summers’ announcement. The GBP rose against the USD, as good figures gave promise to a better economic future for the country, and after a report showed that inflation remained above the Bank of England’s target last month, amid signs that confidence is growing in the UK economy. Cable rose even further, after minutes from the Bank of England showed that policy makers saw no need for more stimulus in the British economy, pushing the British currency to 1.5980 against the USD. The Pound then surged to break major technical levels against the US Dollar to reach a high of 1.6165. The Sterling Pound then erased some of its gains, as retail sales in the UK endured the biggest drop in 10-months, shaking confidence in the British economy. The Pound ended the week at 1.6006. The Japanese Yen opened the week at 99.38, strengthening against a weaker US Dollar at the beginning of the week. The Japanese Yen range traded between 99.00 and 99.30, as FX markets lacking direction ahead of the Fed’s decision. The Yen then gain dramatically against a much weaker US Dollar, to touch a low of 97.76. The Japanese currency then reversed its trend, weakening all the way back to 99.62, as investors started borrowing in low-interest-rate currencies to buy higher yielding currencies. The Japanese Yen closed the week at 99.36. The Swiss Franc strengthened against a weakening US Dollar at the start of the week, as investors seek the safety of the currency ahead of important figures in the US and Euro area, and uncertainty from the Federal Reserve minutes outcome. The CHF opened the week at 0.9297, strengthening to 0.9224 against the USD. The Swiss Franc then strengthened further, in tandem with the JPY, as the US Dollar plummets against most majors, prompting investors to seek safer currencies in the midst of a global financial shock from the Federal Reserve, to touch a low of 0.9090. The Swiss Franc closed the week at 0.9103. American builders started work on fewer US homes than expected last month, supporting the case of Federal Reserve policy makers on their decision to maintain the current stimulus package that is aimed at sustaining the economic expansion of the United States. Housing starts rose 0.9% to 891,000 annual rate, higher than the previous months’ 883,000 which was also weaker than expected.
Sales of previously owned American houses unexpectedly climbed more than forecasted last month to the highest level in more than 6-years, as American buyers rushed to complete their mortgage transactions before interest rates rise any further. Purchases of existing houses climbed by 1.7%, to 5.48 million homes, the highest level since February 2007.
Europe
German Economic Sentiment Climbs
German Investor Confidence rose to the highest level in more than 3-years this month, showing optimism that Europe’s largest economy will continue to expand, in the midst of a global recovery. The ZEW economic sentiment index, which aims to predict economic development 6-months in advance, rose from 42.0 in August to 49.6 this month, the highest level since April 2010. The figure surpassed the expected 45.0.
United Kingdom
Retail Sales Fall the Most in 10-months
The United Kingdoms’ retail sales fell unexpectedly, dropping to -1.0% in August, the biggest drop in 10-months, as demand for food plummeted. Sales from the retail sector declined 0.9% from July, and worse than what was expected by economists at 0.0%. Food demand climbed 2.7% in July, the biggest gain since April 2011, only to erase those exact gains in August, affecting the country’s retail sales.
Commodities
Gold Surged Amid US Dollar Fears
Gold surged on Thursday, following a 21-day drop since August 28, as the Fed stimulus talks sparked fear on $holding investors, hiking demand for the precious metal. Climbing the most in 15-months, Gold touched a high of 1,368.41, from 1,296.44. The gold’s advance pulled silver, platinum, and palladium higher.
The Peninsula
