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Overview
This month’s rally in gold prices above the $1900/oz mark is indicative of structural problems and difficulties at
the global economic level. Investors flocked to gold as a safe-haven investment, leading it to touch all-time
highs almost every-day. The recent (last 2-3 days) decline in gold prices is partly due to profit-booking at higher
levels coupled with expectations of further stimulus measures by Federal Reserve Chairman Ben Bernanke at
the Jackson Hole Symposium. On the back of these positive expectations, markets are witnessing a bit of
stability, and further trend in the global financial markets would be based on the outcome of the decisions
taken by the policymakers and central bankers at this symposium.
Global economic scenario
In about a month’s time, we will enter the fourth and the final quarter of this year, dragging along the ongoing global economic
concerns and rising fears of a double-dip recession. World Gross Domestic Product (GDP) growth for 2011 is estimated to
witness a slowdown as compared to that in 2010 and the International Monetary Fund (IMF) forecasts world GDP growth at 4.4
percent in 2011 as against 5 percent in 2010 (Fig 1). Advanced economies grew at a pace of 3 percent in 2010 and the IMF
expects growth at 2.4 percent in 2011. Growth in the emerging economies is also expected to slow but will fare much better
than that of the advanced economies at 6.5 percent in 2011 as compared to 7.3 percent in 2010. Despite all efforts by global
policymakers, revival in the US and the European economies has come under scanner on account of emergence of debt issues.
At the same time, emerging economies are facing the brunt of high borrowing costs amid rising input prices.
We all know that having a back-up for any job always makes one secure and in the case of the global economy, the emerging
and developing economies have provided support to world economic growth in times of distress. In 2008, GDP of the world and
advanced economies grew at a pace of 2.9 percent and 0.2 percent respectively (Fig 2). But in the same year, emerging
economies witnessed GDP growth of 6.1 percent, thus indicating their strength in the world economy. A similar pattern was
observed in 2009 when GDP growth in the world and advanced economies slipped into the negative territory and that of the
emerging economies rose at 2.7 percent.
In the current context, the economic scenario has become grim and this has affected sentiments in the global financial markets.
Risk appetite has taken a beating as investors keep away from riskier investment assets. Gold,s which is the most favored asset
class has retained its charm and prices have tested levels above $1900/oz (all-time high of $1912/oz in Spot) as investors cling
to the commodity amid rising economic risks. The recent rally in gold was backed on account of the credit ratings downgrade of
the US followed by worries that France, Italy and Spain could be next to face debt issues and thereby ratings downgrade. Japan
is newly added on the list as Moody's cut its rating of Japan's government debt by one notch to Aa3, blaming large budget
deficits and a build up of debt since the 2009 global recession. In the last 2-3 days, we have witnesssed a bit of stability and
better sentiments ahead of Federal Reserve Chairman Ben Bernanke’s speech at the Jackson Hole Symposium today (1930hrs
IST). Every year, the Federal Reserve Bank of Kansas City holds an economic symposium wherein world’s leading economists
and central bankers get together to discuss important economic issues and trends. This year economic concerns in the US and
the Euro Zone have escalated and we expect the highlight of this economic summit to be measures that could help ease these
concerns. Expectations are doing rounds that the collective unit of global policymakers could finally put in some constructive
action towards bringing in strength in the global markets.
This month has witnessed the worst equities performance when compared to 2008 (Fig 3) and has created expectations of
stimulus measures by policymakers as the global economy rattles through a rough patch. The month of August began with
downside pressure across all asset classes as risk aversion gripped the markets, thus leading to a sharp rally in gold prices. Of
late, gold has witnessed the worst possible decline as prices took cues from increase in margins by the CME Group for the
second time this month. The decline in gold prices by more than 4 percent on 24th August was also triggered by the reemergence
of stability in the global financial markets as investors eye Federal Reserve Chairman Ben Bernanke’s speech today.
Whether quantitative easing is actually on the cards or not is still not clear but atleast these expectations have halted the
unprecedented gains in gold.
In 2010’s Jackson Hole meet, Ben Bernanke had announced the second round of quantitative easing program (QE2) and that it
is the reason due to which markets are now expecting an announcement for a third round of quantitative easing (QE3).
But it may not necessarily be so, as the Chairman of the world’s largest central bank may could opt to come out with a different
set of measures altogether including the purchase of bonds with longer term maturities, lowering of interest rates the Fed pays
to the banks on their reserves kept with the central bank. These measures may help to keep the long-term yields down on one
side and on the other may trigger spending/loans by banks to consumers and businesses, in turn boosting economic growth.
Hence, today’s event remains the highlight for financial markets.
If supportive monetary actions continue to be used as earlier, then the gold rally is in for a pause for the time-being i.e. nearterm.
Supportive policies could bring hopes of economic recovery, thereby denting the appeal of gold as a safe-haven asset. On
the other hand, if the Fed goes against market expectations and decides not to make any move then gold prices could bounce
back from the current levels of below $1800/oz due to risk aversion.
We believe, that re-emergence of risk appetite in the global financial markets could be short-lived as risks pertaining to the
downside in the global economy persists. The US debt market has lost its credibility after the credit ratings downgrade and the
recent downgrade of Japan’s credit rating has come in as another financial shock. Any such news or event is capable of denting
investor sentiment, thus leading to a cutback in appetite for higher-yielding and riskier investments in the coming days
Why are world financial markets eyeing the Jackson Hole Symposium?
In order to support the fragile economic situation, the US Federal Reserve had started its interest rates cuts in September 2007.
In 2007 alone, the central bank had cut interest rates by 100 bps and by the year-end interest rates stood at 4.25 percent. But
the rate cutting spree did not stop as the year 2008 began with a reduction in interest rates by 75 bps on 22nd January 2008 to
3.5 percent. The journey ended after interest rates fell to historic lows of 0-0.25 percent on 16th December 2008. Rates
continue to remain in the near zero range and in its meeting on 9th August 2011, the Federal Open Market Committee (FOMC)
indicated that the state of the US economy remains weak and in order to stimulate growth further it was indeed a requirement
to maintain rates in the near zero range until mid-2013.
Last year, at the symposium, Federal Reserve Chairman Ben Bernanke had indicated the QE2 to the tune of $600bn. The impact
of the announcement and implementation of the QE2 program on major asset classes was phenomenal. A major boost was
seen in commodity prices (Fig 4) as the dollar weakened following QE2 announcement. A weaker dollar made dollardenomianted
commodities look attractive for holders of other currencies. The implementation of the QE2 was done to build
confidence and economic growth in the US on the back of defaltionary concerns at that time. In August 2010, the consumer
price index had risen by about 1.2 percent versus the same period in the previous year. At the time of QE2 the status of the US
as the world’s economic superpower was being debated. Since then we have been seeing that economies of the developing
world are gearing themselves for a world economic makeover, which in our opinion could take years to change as the size of
the US economy is huge and it may take years before any other country will takeover the US as the world’s No.1 economy. But
yet we can say that the makeover has begun, which at a slow and steady pace will provide room for other economies to
showcase their economic strengths
But we must not forget that the US is still the economic power and any statement or comment by the Federal Reserve
Chairman today can act a steriod to the global financial markets. We have been witnessing this since he tookover as the
Chairman of the world’s largest central bank. Ben Bernanke gave his first speech as the Chairman of the Federal Reserve at the
Jackson Hole Symposium in 2006, wherein he emphasized on the importance of global economic integration and how it should
be shared widely. In 2007, the housing market bubble had bitten the US economy badly. It is important to note that even then
global policymakers were criticized of late action and measures and it continues to be the case even now. Investors have been
eyeing actions by the policymakers as global equities witnessed its worst performance this month as economic risks widened.
The theme of the conference in 2007 was – Housing, housing finance and monetary policy and in his speech that year Ben
Bernanke discussed the history of the US housing finance system, the dire state of the housing sector and worsening state of
the financial markets. US economic growth had slipped to 1.9 percent in 2007 from 2.7 percent in 2006 as poor state of the
housing market had impacted growth.
From the above table, it is clear that the theme at the Jackson Hole Symposium has been changing over the years depending
upon the global economic state. When world GDP stood at 4.8 percent in 2000, the theme was – Global economic integration:
opportunities and challenges. During that year GDP in the US stood at 4.1 percent and its share in world GDP was a whopping
31 percent, which has fallen to 23 percent in 2010.
Between 2008 and 2009, the theme remained largely focused on the weak state of the global economy and with that we also
witnessed deterioration in world economic growth. In 2009, world GDP declined 0.5 percent and the theme of that year’s
Jackson Hole summit was – Financial stability and macroeconomic policy. It is during this period that global policymakers had
announced a variety of stimulus measures in order to bring a turnaround in the global economy. The average value of the US
Dollar Index (DX) if seen from the perspective of the theme’s each year (in the table above), we can infer that in a healthy
economic scenario the dollar value was above 100 levels and with the weakening economy, the value of the DX has fallen over
time. But in 2009, it was an exception as global economic concerns led to investors buying the dollar as a safe-haven. In the
current year the average DX value has fallen sharply to 76 levels, indicating that the appeal of the dollar is fading on account
economic concerns.
The idea of understanding the themes of this economic symposium is only to get an indication of future trends in the global
financial markets this year. Global financial markets had already factored in (mid-week) expectations that the Federal Reserve
could move ahead with further stimulus measures. This has led to downside in gold on account of profit-booking at higher
levels, and as global equities revived on these hopes. But it is now important to see the actual steps these policymakers take in
order to bring back on track the global economic journey. There is an extent to which the loose monetary policy in the US can
be continued without impacting government fiscal deficits. At this point of time there is a backlash and mounting political
pressure against expanding the Federal Bank’s ballooning balance sheet. Along with these, the inflation in the US is at 3.6
percent (against the 2 percent Fed’s target rate of inflation), higher than a year ago which may also be an important
determining factor in deciding the further growth boosting monetary strategies.
We cannot expect the Federal Reserve to necessarily chalk out a QE3 as since the QE2 journey has begun there have always
been doubts over its effectiveness. Further trend in the markets will now be dependent on the intentions of the Federal
Reserve today and how the world’s largest central bank uses its cards. Whether more stimulus or not, each strategy comes
along with a hurdle and Fed’s action may depend upon what seems as the most politically viable option.
Markets will have to gear up ahead of Bernanke’s speech as it will help set future trends. If the Fed applies its growth cards
abundantly only then will risk appetite get a boost in the near-term. But most likely, we feel that the Fed will remain cautious
and opt for measures other than QE3 for the time being.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Overview
This month’s rally in gold prices above the $1900/oz mark is indicative of structural problems and difficulties at
the global economic level. Investors flocked to gold as a safe-haven investment, leading it to touch all-time
highs almost every-day. The recent (last 2-3 days) decline in gold prices is partly due to profit-booking at higher
levels coupled with expectations of further stimulus measures by Federal Reserve Chairman Ben Bernanke at
the Jackson Hole Symposium. On the back of these positive expectations, markets are witnessing a bit of
stability, and further trend in the global financial markets would be based on the outcome of the decisions
taken by the policymakers and central bankers at this symposium.
Global economic scenario
In about a month’s time, we will enter the fourth and the final quarter of this year, dragging along the ongoing global economic
concerns and rising fears of a double-dip recession. World Gross Domestic Product (GDP) growth for 2011 is estimated to
witness a slowdown as compared to that in 2010 and the International Monetary Fund (IMF) forecasts world GDP growth at 4.4
percent in 2011 as against 5 percent in 2010 (Fig 1). Advanced economies grew at a pace of 3 percent in 2010 and the IMF
expects growth at 2.4 percent in 2011. Growth in the emerging economies is also expected to slow but will fare much better
than that of the advanced economies at 6.5 percent in 2011 as compared to 7.3 percent in 2010. Despite all efforts by global
policymakers, revival in the US and the European economies has come under scanner on account of emergence of debt issues.
At the same time, emerging economies are facing the brunt of high borrowing costs amid rising input prices.
We all know that having a back-up for any job always makes one secure and in the case of the global economy, the emerging
and developing economies have provided support to world economic growth in times of distress. In 2008, GDP of the world and
advanced economies grew at a pace of 2.9 percent and 0.2 percent respectively (Fig 2). But in the same year, emerging
economies witnessed GDP growth of 6.1 percent, thus indicating their strength in the world economy. A similar pattern was
observed in 2009 when GDP growth in the world and advanced economies slipped into the negative territory and that of the
emerging economies rose at 2.7 percent.
In the current context, the economic scenario has become grim and this has affected sentiments in the global financial markets.
Risk appetite has taken a beating as investors keep away from riskier investment assets. Gold,s which is the most favored asset
class has retained its charm and prices have tested levels above $1900/oz (all-time high of $1912/oz in Spot) as investors cling
to the commodity amid rising economic risks. The recent rally in gold was backed on account of the credit ratings downgrade of
the US followed by worries that France, Italy and Spain could be next to face debt issues and thereby ratings downgrade. Japan
is newly added on the list as Moody's cut its rating of Japan's government debt by one notch to Aa3, blaming large budget
deficits and a build up of debt since the 2009 global recession. In the last 2-3 days, we have witnesssed a bit of stability and
better sentiments ahead of Federal Reserve Chairman Ben Bernanke’s speech at the Jackson Hole Symposium today (1930hrs
IST). Every year, the Federal Reserve Bank of Kansas City holds an economic symposium wherein world’s leading economists
and central bankers get together to discuss important economic issues and trends. This year economic concerns in the US and
the Euro Zone have escalated and we expect the highlight of this economic summit to be measures that could help ease these
concerns. Expectations are doing rounds that the collective unit of global policymakers could finally put in some constructive
action towards bringing in strength in the global markets.
This month has witnessed the worst equities performance when compared to 2008 (Fig 3) and has created expectations of
stimulus measures by policymakers as the global economy rattles through a rough patch. The month of August began with
downside pressure across all asset classes as risk aversion gripped the markets, thus leading to a sharp rally in gold prices. Of
late, gold has witnessed the worst possible decline as prices took cues from increase in margins by the CME Group for the
second time this month. The decline in gold prices by more than 4 percent on 24th August was also triggered by the reemergence
of stability in the global financial markets as investors eye Federal Reserve Chairman Ben Bernanke’s speech today.
Whether quantitative easing is actually on the cards or not is still not clear but atleast these expectations have halted the
unprecedented gains in gold.
In 2010’s Jackson Hole meet, Ben Bernanke had announced the second round of quantitative easing program (QE2) and that it
is the reason due to which markets are now expecting an announcement for a third round of quantitative easing (QE3).
But it may not necessarily be so, as the Chairman of the world’s largest central bank may could opt to come out with a different
set of measures altogether including the purchase of bonds with longer term maturities, lowering of interest rates the Fed pays
to the banks on their reserves kept with the central bank. These measures may help to keep the long-term yields down on one
side and on the other may trigger spending/loans by banks to consumers and businesses, in turn boosting economic growth.
Hence, today’s event remains the highlight for financial markets.
If supportive monetary actions continue to be used as earlier, then the gold rally is in for a pause for the time-being i.e. nearterm.
Supportive policies could bring hopes of economic recovery, thereby denting the appeal of gold as a safe-haven asset. On
the other hand, if the Fed goes against market expectations and decides not to make any move then gold prices could bounce
back from the current levels of below $1800/oz due to risk aversion.
We believe, that re-emergence of risk appetite in the global financial markets could be short-lived as risks pertaining to the
downside in the global economy persists. The US debt market has lost its credibility after the credit ratings downgrade and the
recent downgrade of Japan’s credit rating has come in as another financial shock. Any such news or event is capable of denting
investor sentiment, thus leading to a cutback in appetite for higher-yielding and riskier investments in the coming days
Why are world financial markets eyeing the Jackson Hole Symposium?
In order to support the fragile economic situation, the US Federal Reserve had started its interest rates cuts in September 2007.
In 2007 alone, the central bank had cut interest rates by 100 bps and by the year-end interest rates stood at 4.25 percent. But
the rate cutting spree did not stop as the year 2008 began with a reduction in interest rates by 75 bps on 22nd January 2008 to
3.5 percent. The journey ended after interest rates fell to historic lows of 0-0.25 percent on 16th December 2008. Rates
continue to remain in the near zero range and in its meeting on 9th August 2011, the Federal Open Market Committee (FOMC)
indicated that the state of the US economy remains weak and in order to stimulate growth further it was indeed a requirement
to maintain rates in the near zero range until mid-2013.
Last year, at the symposium, Federal Reserve Chairman Ben Bernanke had indicated the QE2 to the tune of $600bn. The impact
of the announcement and implementation of the QE2 program on major asset classes was phenomenal. A major boost was
seen in commodity prices (Fig 4) as the dollar weakened following QE2 announcement. A weaker dollar made dollardenomianted
commodities look attractive for holders of other currencies. The implementation of the QE2 was done to build
confidence and economic growth in the US on the back of defaltionary concerns at that time. In August 2010, the consumer
price index had risen by about 1.2 percent versus the same period in the previous year. At the time of QE2 the status of the US
as the world’s economic superpower was being debated. Since then we have been seeing that economies of the developing
world are gearing themselves for a world economic makeover, which in our opinion could take years to change as the size of
the US economy is huge and it may take years before any other country will takeover the US as the world’s No.1 economy. But
yet we can say that the makeover has begun, which at a slow and steady pace will provide room for other economies to
showcase their economic strengths
But we must not forget that the US is still the economic power and any statement or comment by the Federal Reserve
Chairman today can act a steriod to the global financial markets. We have been witnessing this since he tookover as the
Chairman of the world’s largest central bank. Ben Bernanke gave his first speech as the Chairman of the Federal Reserve at the
Jackson Hole Symposium in 2006, wherein he emphasized on the importance of global economic integration and how it should
be shared widely. In 2007, the housing market bubble had bitten the US economy badly. It is important to note that even then
global policymakers were criticized of late action and measures and it continues to be the case even now. Investors have been
eyeing actions by the policymakers as global equities witnessed its worst performance this month as economic risks widened.
The theme of the conference in 2007 was – Housing, housing finance and monetary policy and in his speech that year Ben
Bernanke discussed the history of the US housing finance system, the dire state of the housing sector and worsening state of
the financial markets. US economic growth had slipped to 1.9 percent in 2007 from 2.7 percent in 2006 as poor state of the
housing market had impacted growth.
From the above table, it is clear that the theme at the Jackson Hole Symposium has been changing over the years depending
upon the global economic state. When world GDP stood at 4.8 percent in 2000, the theme was – Global economic integration:
opportunities and challenges. During that year GDP in the US stood at 4.1 percent and its share in world GDP was a whopping
31 percent, which has fallen to 23 percent in 2010.
Between 2008 and 2009, the theme remained largely focused on the weak state of the global economy and with that we also
witnessed deterioration in world economic growth. In 2009, world GDP declined 0.5 percent and the theme of that year’s
Jackson Hole summit was – Financial stability and macroeconomic policy. It is during this period that global policymakers had
announced a variety of stimulus measures in order to bring a turnaround in the global economy. The average value of the US
Dollar Index (DX) if seen from the perspective of the theme’s each year (in the table above), we can infer that in a healthy
economic scenario the dollar value was above 100 levels and with the weakening economy, the value of the DX has fallen over
time. But in 2009, it was an exception as global economic concerns led to investors buying the dollar as a safe-haven. In the
current year the average DX value has fallen sharply to 76 levels, indicating that the appeal of the dollar is fading on account
economic concerns.
The idea of understanding the themes of this economic symposium is only to get an indication of future trends in the global
financial markets this year. Global financial markets had already factored in (mid-week) expectations that the Federal Reserve
could move ahead with further stimulus measures. This has led to downside in gold on account of profit-booking at higher
levels, and as global equities revived on these hopes. But it is now important to see the actual steps these policymakers take in
order to bring back on track the global economic journey. There is an extent to which the loose monetary policy in the US can
be continued without impacting government fiscal deficits. At this point of time there is a backlash and mounting political
pressure against expanding the Federal Bank’s ballooning balance sheet. Along with these, the inflation in the US is at 3.6
percent (against the 2 percent Fed’s target rate of inflation), higher than a year ago which may also be an important
determining factor in deciding the further growth boosting monetary strategies.
We cannot expect the Federal Reserve to necessarily chalk out a QE3 as since the QE2 journey has begun there have always
been doubts over its effectiveness. Further trend in the markets will now be dependent on the intentions of the Federal
Reserve today and how the world’s largest central bank uses its cards. Whether more stimulus or not, each strategy comes
along with a hurdle and Fed’s action may depend upon what seems as the most politically viable option.
Markets will have to gear up ahead of Bernanke’s speech as it will help set future trends. If the Fed applies its growth cards
abundantly only then will risk appetite get a boost in the near-term. But most likely, we feel that the Fed will remain cautious
and opt for measures other than QE3 for the time being.
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