The FTSE 100 ended the week above 5,700 after rising 0.8% during the last five days of trading. Stocks were once again driven by anticipation of more quantitative easing (QE) from the Federal Reserve, which now seems imminent after Fed Chairman Ben Bernanke said more action is warranted.
In his yesterday’s speech in Boston, Bernanke stated that the risk of deflation was higher than desirable and that the pace of economic growth anticipated in 2011 would do little to improve the currently high unemployment rate that stands at nearly 10%.
The Fed’s options include printing more money and buying more government debt to boost inflation and encourage Americans to up their spending.
The size of the second round of QE is yet to be determined.
Bernanke’s comments hardly came as a surprise after the minutes of the Fed’s Open Market Committee (FOMC) latest policy meeting revealed that regulators were in favour of implementing more stimulus measures sooner rather than later.
The increased chances of more asset purchases by the Fed were priced in following the FOMC minutes as equities on both sides of the Atlantic did not react to the Fed Chairman’s speech.
In late September, JP Morgan Chase (NYSE:JPM) estimated the chances that the Fed will begin a new round of QE by the end of the current year at 75%.
Bernanke’s statements lent some support to the US dollar, which rebounded from 8 month lows against the euro with the EUR/USD rate sliding from 1.415 to 1.403, leading to a decline in gold and oil prices.
In addition to that, the commodities got hit by Friday’s disappointing update on the University of Michigan consumer sentiment index, which dropped from 68.2 to 67.9 in October. Analysts expected the preliminary reading to show an increase to over 69.
This more than offset the positive impact of other data released that day. US retail sales climbed 0.6% in September, while the Empire State manufacturing index rose 12 points to 15.73, reflecting a higher level of manufacturing activity in New York.
The start of the week was quiet and the FTSE 100 was heavily influenced by movements in oil and metal prices that were impacting mining and energy stocks.
The UK blue chips surged on Wednesday following the release of the FOMC minutes. Wednesday’s data showed a 5,300 increase in jobless claims in the UK in September, while the Mortgage Bankers Association’s Market Composite Index rose 14.6%, signalling the first increase in mortgage applications in the US in six weeks, while refinancing was up 21%.
Thursday’s weekly update on jobless claims revealed that initial jobless claims rose 13,000 to 462,000 last week, defying analysts’ expectations of a decline.
Following the weak jobs data, the FTSE 100 dropped 0.35%, which was followed by a 0.4% decline on Friday, trimming the weekly gain in the index to 0.8%.
The FTSE 100 is currently projected to open with a 0.2% gain on Monday.