For the mid-week ending August 13, 2015, the first three days of the week saw extreme panic in the markets. In other news: China’s PBOC devalues yuan thrice in three days; economic data shows growing economy; and, Hillary Clinton to propose $350 billion education plan.
After three days of major moves in the markets, panic subsides as global markets rebound on Thursday. On Monday, the S&P 500 rose a dramatic 1.28 percent (26.61 points) causing panic amongst short sellers, only to be followed by a sharp drop on Tuesday of -0.96 percent (-20.11 points) in a surprise devaluation of the yuan by the PBOC (China’s central bank). A second surprise devaluation occurred Wednesday causing a -1.44 percent (-30 points) drop midday before an afternoon rally allowed the S&P 500 to close up 0.10 percent (1.98 points). This late rally essentially squelched the panic in the markets. A third day of devaluation has had little negative impact on global markets, which now show strong recoveries (CAC rose 1.8 percent; DAX rose 1.9 percent; FTSE 100 rose 0.7 percent).
China devalues the yuan for a third straight day this week, putting global financial markets on edge that a currency war may ensue. It also called into question the health of the world’s second-largest economy. European markets in England, Germany, and France closed lower on Wednesday over concerns of a struggling Chinese economy growing slower than anticipated; but the U.S. market recovered from early weakness closing mostly higher. Analysts view the devaluation of the yuan as a way for China to improve exports and push reforms that will make the yuan become another reserve currency within the IMF’s SDR (special drawing rights) group. The PBOC intervened on Wednesday to stabilize the yuan through direct market intervention when the markets reacted strongly, and this helped squelch the panic.
Economic data for the U.S. shows the economy is improving, increasing expectations of a Fed rate hike in September. Retail sales are up for July rising 0.6 percent (0.5 percent expected), and the prior month’s figure was revised upward to unchanged (previously -0.3 percent). Weekly mortgage applications are up 0.1 percent as rates remain unchanged; this is nearly 18 percent above prior year’s levels. Wholesale inventories are up a solid 0.9 percent which will increase GDP; inventories are a key component to the calculation of GDP. And, nonfarm productivity rebounded in the second quarter 1.3 percent while a weak underlying trend suggests inflation could rise more quickly than expected; productivity is a metric that the Fed Reserve watches very closely.
Democratic presidential candidate Hillary Clinton will unveil a $350 billion plan to make colleges more affordable. This plan will be presented at a town hall meeting in New Hampshire on Monday, the state with the highest average student debt amongst all states. The plan’s central component is a $200 billion federal incentive system that encourages states to expand investments in higher education and cut tuition costs for students. States would be eligible for federal funds if they guarantee “no-loan” tuition at four-year public universities and free tuition at community colleges. However, another Democratic presidential contender Bernie Sanders presented his plan that would eliminate tuition and fees for public universities. His $70 billion plan would be funded annually through taxes on transactions by investment banks, hedge funds, and other Wall Street firms.
If you’re trading options, it is suggested trading Put Credit spreads for the week at 2 standard deviations or greater. Expect the price of the SPX to fall within 2051 and 2113 (2 standard deviations) by this Friday.
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