14.09.12 Friday Morning

This week will likely be remembered for a cocktail mix of cautious sentiment, volatility and eventually euphoria.

The trading week began uneventfully, but with a hint of cautiousness hanging over the markets as investors struggled to find any optimism following poor Asian data released over the weekend showing Japanese GDP shrank more than forecasted.

Worse than expected industrial production figures from China also failed to impress the markets.

In addition, talks over the weekend that the Troika have rejected some of Greece’s austerity measures further disgruntled sentiment.

Tuesday also began without a thrill as the global markets traded between tight ranges.

Investors opted to remain complacent in the face of risk assets as uncertainty surrounding whether Germany’s constitutional courts would approve the legitimacy of the European Financial Stability Mechanism (EFSM), unsettled investors.

Moreover, comic book villain Moody’s attempted to ignite some chaos by threatening to downgrade the US.  Markets hardly reacted, noting the futility of a potential downgrade compared with more pertinently worrying global data.

Midweek, we observed an indication of bulls emerging and taking control of investor’s sentiment driven by news that Germany’s constitutional courts have approved the use of the EFSM to help some struggling Eurozone member’s debt yields.

Eventually, on Thursday, global markets were finally gifted with what the majority of investors had hoped for.  That gift came from US Fed Chairman, Ben Bernanke, in the form of a further round of quantitative easing (QE).

The Fed has pledged to buy $40 billion of mortgage back securities each month to help foster growth as well as boost a flagging US labour market.

Although there have been concerns over the potential inflationary consequences of such a stimulus, indeed Gold rallied as a result yesterday as well as today, bears have found controlling the roar of optimism coming from bulls yesterday and continuing on Friday morning, near impossible. 

Equity story of the week would probably go to BAE systems.

The aerospace and defence firm flew to almost 7% on Wednesday following news releases that the company could merge with EADS, one of Europe’s largest aerospace and defence firms.

The merger could finally lead to a European conglomerate able to rival US giant Boeing.

However, the following day, BAE’s share price dropped by over 7% as profit taking traders as well as doubts over the potential merger caused BAE to shed Wednesday’s gains.

Next week, investors will have the opportunity to digest a tranche of global data to help whet investors’ appetite for risk.

Sentiment figures from the Eurozone, US housing data as well as Japanese trade balance figures are likely to suffice. 

However, bulls should be wary. Since investors are no longer going to be obsessed with further QE from the US the markets are likely to return their attention back to the Eurozone.

Since the Eurozone debt crisis is unlikely to be solved from a single speech announcing further stimulus, bulls should probably brace for a return of the bears next week.