August enthusiasm cools

As investors close out the summer of 2012, global markets ended last week mostly lower.

After touching a 4-year high, the S&P500 posted its first flat week in almost two months. The S&P/TSX managed to make its third consecutive weekly gain on the back of higher gold and oil prices.

Sentiment towards central bankers’ pending stimuli initiatives also shifted. The tone of the FOMC meeting minutes was initially interpreted as though Quantitative Easing 3 was a done deal, but the ensuing and detailed scrutiny of the Fed’s choice of words left investors not fully convinced.

Read: Will QE be effective?

The economic data was a mixed bag last week, with rays of hope in the U.S. housing market dampened by a weak July durable goods and rising weekly jobless claims. The latter does not bode well for the August employment report.

Also last week, the bullish sentiment that developed after Mario Draghi’s proclamation of ‘doing whatever it takes’ came under renewed scrutiny. The ECB is now saying it may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of their bond buying plans.

Greece’s Prime Minister Samaras also got the cold shoulder from Germany’s Angela Merkel in meetings this week. Samaras didn’t ask for more money, but he does want more time to carry out Greek policy changes.

Merkel held to the script of saying she wants Greece to stay in the Eurozone but they have to meet their obligations. Sound familiar?

Printing money to bolster economic growth had gold traders getting bullish. Gold closed above its 200-day moving average last Wednesday for the first time since March, which may be a “shot in the arm” for prices to rally toward $1,700.

Read: Faceoff: Is gold overvalued?

Crude oil was volatile but held on to its fourth weekly gain as Tropical Storm Isaac looked to gain hurricane status before reaching the Gulf Coast next week.

The Gulf Coast is home to one third of US oil production and about 40% of its refining capacity. Not surprisingly, you can expect higher gasoline prices ahead of Labour Day.

The Canadian dollar finished the week lower but still above par after our wholesale & retail sales unexpectedly fell in June. Like everywhere else, Canada’s economy also struggles to find its momentum.

PRECIOUS METALS GET A QUICK LIFT

Expectations of an improvement in the global macro-economic environment have intensified over the course of the past week, helping push gold through the high side of its recent trading range.

The price of gold finally broke following the release of the minutes of the most recent FOMC meeting. The language used in the minutes clearly raised the market’s expectations for additional QE, likely at the Fed’s September 13th meeting.

Spot gold moved close to US$1,665/oz after having broken above $1,640 earlier in the week for the first time since early May. The Euro currency made gains at the expense of the U.S. dollar this week with comments from Germany and Greece bolstering hopes for a solution to the Euro zone crisis.

TRADING WEEK AHEAD

Expectations for an improved global macro-economic environment, particularly through central bank assistance, have intensified in the past few weeks.

This fresh hope for monetary easing presents investors with a big challenge. Will or won’t the Fed launch QE? Will it be economically effective and to what degree? How will investment markets react?

We believe the next couple of weeks may be the most critical for investing in 2012. With the pending Jackson Hole, ECB, and Federal Reserve meetings, we expect markets to react in a binary fashion: they will either really like the outcome and extend recent gains, or they will not and we can expect a significant selloff to ensue.

First up will be Ben Bernanke’s annual speech from Jackson Hole, WY on Friday (10:00 am EST). The Fed Chairman used this venue to set the stage for his second round of Quantitative Easing. Might he do the same this year? It’s a close call, but the markets expect it.

Economic data from this point to the Fed meeting on September 12th will be heavily scrutinized. In the week ahead, another read on Q2 U.S. GDP data should show the world’s largest economy only growing between 1.5% and 2.0%.

In addition, housing and factory reports for August and the important weekly jobless claims in the lead up to the August payrolls report are due September 7th.

Read: Housing: Will the bubble burst?

In Canada, the Q2 GDP should add to other recent downside surprises in August that suggests the Bank of Canada is not likely to act on its conditional hawkishness anytime soon. Growth should come in below our central bank’s forecast of 1.8% and the BoC’s 2012 potential output assumption (2.0%).

Canadian banks are expected to reveal their lowest profit growth in two quarters as consumer lending has eased and capital markets trading activity has been light.

Bank of Montreal kicks off bank earnings season Tuesday with the rest of the Canadian banks reporting their results by August 31st.

David Andrews is the Director, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @David_RGMP