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UK stock market commentary (August 31, 2012): Big Day for Bernanke

So all eyes on Ben Bernanke today as he will give his words of wisdom at Jackson Hole today and as indicated by investors across the pond last night expectations of any radical announcement have been quashed after the Dow recorded a three digit fall. The central banker has his hands tied behind his back somewhat as he isn’t supposed to announce official policy decisions at the symposium but it hasn’t stopped him in the past from giving significant hints that something is imminent. Markets may be disappointed by what he has to say later today however expectations are still that new stimulus will be announced at the next FOMC meeting on 13th September.

Even though this week’s US GDP figures received a little upgrade to 1.7% there is a disconnect between the GDP number and the GDI (gross domestic income) number was far worse at 0.6% indicating that the real level of grow in the US economy is somewhere in between the two. Growth of around 1% is not enough to bring unemployment in the world’s biggest economy down and even though the last non farm payroll number was a ray of light, the rate of unemployment ticked up.

This is only one of the many arguments that the “stimulists” are claiming that is evidence that QE3 is required in order to prevent inflation from heading lower and another recession taking hold. Ultimately it’s the fear that deflation could take hold which is the biggest argument in favour of more stimulus, something that has been the driving force behind Ben Bernanke’s QE programs to date and so he doesn’t want to risk that happening in the near future. One thing that investors are most likely to see in the coming weeks is that if neither the ECB or the Fed announce something to provide some sort of assistance to their respective economies then markets will probably see the recent mounting pressure to the downside become more of a force to be reckoned with.

As mentioned the Dow was knocked off its perch somewhat yesterday but this was also down to continued fears that the European debt crisis is deepening despite ongoing efforts to deal with it. On top of that, Japan joined the club of countries foreseeing a deterioration in the global economic picture. This morning European indices are mixed at the open with the FTSE trading at 5720 at the time of writing. It’s grind lower in recent days is testing the mettle of the bulls who will want to see something special from Jackson Hole today to swing sentiment back into their favour. Near term support and resistance for the index is seen at 5700, 5685, 5660 and 5760, 5780 respectively.

A report by the IMF said the ECB had more room for an easing stance pushing investors out of the euro. However, the decline of just 24 pips to 1.2507 could imply a lack of real conviction ahead of Bernanke’s speech. Meanwhile, Spain's decision to delay its formal asking for a bailout and a half decent Italian bond auction meant that traders didn’t completely flee the single currency. This morning sees EUR/USD trading at 1.2510 at the time of writing and support and resistance is seen at 1.2480, 1.2460 and 1.2560, 1.2590 respectively.

Gold finished rather flat at 1655.30 yesterday as participants were in no mood to bet one way or the other before hearing Bernanke’s speech. The chart shows the rally which has been triggered by the assumption that QE3 is near, has lost some steam with the market price now below the 9 day moving averages. At the same time the medium term trend still points upwards.

As Hurricane Isaac was downgraded to a Tropical Storm without major impact on refineries, oil workers started to return. So crude prices’ direction was again dictated by the usual drivers, the greenback combined with the stock market. Consequently, the WTI crude lost 68 cents to $94.62 as investors were looking ahead to extra hints from the policy makers before committing any further.