Draghi Speaks: Stocks, Bonds and Everything Else Moves

Closing the Week with Forexpros

by Forexpros Staff

U.S. stock prices soared on Friday on talk the Federal Reserve and the European Central Bank are set to stimulate their respective economies via monetary easing tools.

At the close of U.S. trading, the Dow Jones Industrial Average ended up 1.46%, the S&P 500 index was up 1.91% while the Nasdaq Composite index was up 2.24%.

Soaring yields in Spanish government debt markets prompted ECB President Mario Draghi to publicly state European monetary policy authorities will do all they can to save the eurozone, with markets concluding such measures will involve bond purchases from banks.

Talk that the Federal Reserve will stimulate the U.S. economy also through buying bonds from banks, known as quantitative easing, picked up steam on Friday in wake of lackluster second-quarter gross domestic product figures.

Quantitative easing pumps liquidity into the economy, weakening paper currencies while sending stock prices higher.

U.S. Economic Indicators Middling

The U.S. GDP expanded 1.5% in the second quarter, according to advance estimates from the Commerce Department, in line with expectations.

However, expectations called for sluggish expansion in the first place, as the economy continues limping along its road to recovery and in greater need of a monetary crutch sooner or later.

Consumer sentiment figures behaved in a similar manner on Friday, beating estimates but confirming broader sentiment that recovery will require tools from the Fed that weaken the greenback in exchange for more price stability and conditions that foster job creation.

The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment fell to 72.3 in July from 73.2 in June.

Analysts, however, were expecting the figure to fall lower to 72.0, the preliminary figure for July.

The U.S. will release July’s jobs report next week, and fears of lackluster numbers also primed talk of Fed intervention.

Strong and Weak Stocks

Leading Dow Jones Industrial Average gainers included Merck, up 4.08%, Caterpillar, up 3.47%, and Alcoa, up 3.30%.

The Dow Jones Industrial Average’s worst performers included Kraft Foods, up 0.10%, McDonald’s Corp., up 0.21%, and Walt Disney Co., up 0.44%.

European indices, meanwhile, finished up.

After the close of European trade, the EURO STOXX 50 rose 2.23%, France’s CAC 40 rose 2.28%, while Germany’s DAX 30 finished up 1.62%. Meanwhile, in the U.K. the FTSE 100 rose 0.97%.

Currency Markets

The dollar fell against most major global currencies on Friday after second-quarter gross domestic product (GDP) figures in the U.S. fueled more talk the Federal Reserve will feel obliged to stimulate the U.S. economy even if not now but later down the road.

In U.S. trading on Friday, EUR/USD was up 0.12% at 1.2297, erasing earlier gains.

The greenback was down against the pound, with GBP/USD trading up 0.22% at 1.5721

The dollar was up against the yen, with USD/JPY trading up 0.54% at 78.61, and down against the Swiss franc, with USD/CHF trading down 0.21% at 0.9757.

The dollar was down against its cousins in Canada, Australia and New Zealand, with USD/CAD down 0.57% at 1.0042, AUD/USD up 0.70% at 1.0469 and NZD/USD up 0.95% at 0.8096.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.15% at 82.77.

Gold Gains

Gold prices rose in U.S. trading on Friday after lackluster gross domestic product rates fueled more talk of Federal Reserve stimulus even though growth figures met expectations.

On the Comex division of the New York Mercantile Exchange, gold futures for August delivery were up 0.35% and trading at USD1,620.75 a troy ounce, up from a session low of USD1,610.75 and down from a high of USD1,628.55 a troy ounce early during the session.

Gold futures were likely to test support at USD1,610.75 a troy ounce, the earlier low, and resistance at USD1,628.55, the earlier high.

Gold and the dollar trade inversely, and mere talk of Fed easing can send the greenback falling and the yellow metal gaining.

Gold, meanwhile, tracked the euro higher as well.

Elsewhere on the Comex, silver for September delivery was up 0.54% and trading at USD27.593 a troy ounce, while copper for September delivery was up 0.97% and trading at USD3.426 a pound.

Oil

Crude oil futures rose in U.S. trading on Friday.  On the New York Mercantile Exchange, light, sweet crude futures for delivery in September traded at USD90.31 a barrel on Friday, up 1.03%, off from a session high of USD90.39 and up from an earlier session low of USD89.14.

On the ICE Futures Exchange, Brent oil futures for September delivery were up 1.00% and trading at USD106.31 a barrel, up USD16.00 from its U.S. counterpart.

Natural Gas

Natural gas futures moved lower Friday during U.S. morning trade, after profit takers hit the commodity that spiked higher Thursday on a report from the U.S. Energy Information Administration indicating U.S. gas supplies rose broadly in line with market expectations last week

On the New York Mercantile Exchange, natural gas futures for delivery in August traded at USD3.041 per million British thermal units during U.S. morning trade, falling 1.67%.

Sparking the earlier rally, the U.S. Energy Information Administration said in its weekly report that natural gas storage in the U.S. in the week ended July 20 rose by 26 billion cubic feet, broadly in line with market expectations.

Inventories rose by 48 billion cubic feet in the same week a year earlier, while the five-year average change for the week is an increase of 61 billion cubic feet, according to U.S. Energy Department data.

Total U.S. natural gas storage stood at 3.189 trillion cubic feet as of last week. Stocks were 487 billion cubic feet higher than last year at this time and 435 billion cubic feet above the five-year average of 2.754 trillion cubic feet for this time of year.

U.S. gas inventories did not hit the milestone 3 trillion cubic feet level until August 31 of last year. Stocks peaked last year in November at a record 3.852 trillion cubic feet.

The report showed that in the East Region, stocks were 167 billion cubic feet above the five-year average, following a net injection of 20 billion cubic feet.

Stocks in the Producing Region were 181 billion cubic feet above the five-year average of 938 billion cubic feet, after a net withdrawal of 1 billion cubic feet.

Natural gas futures found further support from weather forecasts showing hotter-than-normal temperatures across most parts of the U.S. in the next two weeks.

The National Weather Service’s six-to-ten-day outlook issued on Monday called for above-normal temperatures for much of the eastern two-thirds of the nation.

Warmer-than-normal temperatures increase the need for gas-fired electricity to power air conditioning, boosting demand for natural gas. Natural gas accounts for about a quarter of U.S. electricity generation.

A bout of hot weather across much of the country over the last several weeks helped boost natural gas prices. Spot prices have rallied nearly 45% in the past five weeks, as extreme heat conditions across the U.S. boosted cooling demand for the fuel.

The recent gains helped push natural gas futures into positive territory for 2012. The fuel is now up 4.5% in 2012. Concerns over bloated inventories and weak winter demand dragged prices down to a decade low of USD1.907 per million British thermal units on April 19.

However, market analysts have warned that without strong demand through the rest of the summer, gas inventories will reach the limits of available capacity later this year.

The storage surplus to last year will have to be cut by at least another 210 billion cubic feet in the 16 weeks left before winter withdrawals begin to avoid breaching the government’s 4.1 trillion cubic feet estimate of total capacity.

From a technical standpoint, market participants noted that prices have further room to move higher after futures closed above the key USD3.00-level for the first time since January.

The USD3.00-level is psychologically important to some traders, who see that price as the point at which power plants will begin switching from natural gas to coal.

Speculation that utility providers in the U.S. were switching from pricier coal to cheaper natural gas helped boost prices off a 10-year low of USD1.902 hit in mid-April.

Barclays kept its fourth quarter natural gas price outlook at USD3.00. The bank raised its full year price average to USD2.64, up almost 8% from a previous estimate of USD2.43.

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