For the week ending August 28, 2015, the Dow and S&P 500 went through some wide swings ending slightly up. The Dow rose 1.1 percent for the week, and the S&P 500 rose 0.9 percent. In other news: China announces new stimulus measures which help the markets to recover sharp losses; key FOMC members are still on the fence with regard to a September rate hike; and, the big economic news has been the strong upward revision to GDP. Below is a recap of the markets for each day of the week.
The markets dropped sharply on Monday as panic selling swept stocks and oil. Big declines in China’s Shanghai Composite index (down -8.5 percent) initiated the panic. Oil dropped $2 to $38. The Dow dropped -3.6 percent to 15,871; the S&P 500 dropped -3.94 percent to 1,893.
On Tuesday the markets ended down after rallying most of the day due to perceived risks with China. Oil rose $1 to $39. The Dow fell -1.3 percent to 15,666; the S&P 500 fell -1.35 percent to 1,868.
On Wednesday the markets sharply rose on bargain hunting. Oil remained flat at $39. The Dow rose 4.0 percent to 16,285; the S&P 500 rose 3.90 percent to 1,941.
The markets rose again on Thursday as bargain hunting continued. Oil rose $4.00 to $42.75. The Dow rose 2.3 percent to 16,654; the S&P 500 rose 2.43 percent at 1,988.
On Friday the markets were mixed as weak economic data (core PCE index) reduced the possibility of a September Fed rate hike. Oil rose $2.75 to $45.50. The Dow dropped fractionally to 16,643; the S&P 500 rose fractionally to 1,989.
China is rolling out its biggest stimulus effort since 2008 in an attempt to stop the financial crisis. Many speculate that China’s GDP is actually well below 7 percent and careening toward a hard landing. The ambitious plan is multipronged consisting of the following: rein in national debt by curbing local governments from off-balance sheet borrowing; a push for the yuan to be included in the IMF’s reserve currency group; a 2 trillion yuan debt swap to help convert short-term high-cost notes into long-term low-yielding municipal bonds; increased infrastructure spending on underground pipes and water treatment; and, further cuts in the interest rate.
Fears over the health of China’s economy sent markets on a roller-coaster ride and have reduced the possibility of a September Fed rate hike. Markets will be watching business surveys, trade data, factory orders, and employment numbers to determine when a rate hike will likely occur. Recent economic news indicates that the U.S. economy is growing at a much stronger rate than anticipated for the second quarter, due largely to increased domestic demand; however, growing inventories may curb some of the growth.
Key FOMC members have mixed opinions regarding a September Fed rate hike. Federal Reserve members William Dudley, Stanley Fischer, Narayana Kocherlakota, Esther George, and Loretta Mester all take a wait-and-see attitude before committing to a decision at September’s meeting, two weeks from now. With the debate heating up, the above members have been stating their opinions on The Wall Street Journal, CNBC, and press conferences.
A strong upward revision to GDP in the second quarter supports a September Fed rate hike. The Commerce Department released its GDP rate at 3.7 percent, up from the initial estimate of 2.3 percent. The main driver of GDP growth has been consumer spending, with outlays up 3.1 percent (from 1.8 percent in the first quarter). Businesses invested at a rate of 3.2 percent with spending on structures up 3.1 percent. Inflation remains at a low rate of 2.2 percent. While this unexpected growth would support a September rate increase, recent turmoil in global markets (especially China) have reduced the possibility.
The bottom line: the U.S. economy is proving stronger than expected, with a third quarter lift in the consumer sector and possibly exports. However, the gyrations in China’s markets have increased uncertainty and concern over the global economy. Any chance for a September rate hike will come from the August employment report.
The focus next week in the U.S. will be on the August employment report. In addition, motor vehicle sales and the Beige Book will provide information on the consumer, factory, and services sectors. Globally the focus will be on ECB’s monetary policy decision (no changes expected). In addition, the focus will be on the following: UK (manufacturing PMI, services PMI); eurozone (manufacturing PMI, unemployment rate, services & composite PMI, retail sales, GDP); Germany (manufacturing PMI, unemployment rate, services & composite PMI, manufacturing orders); China (manufacturing PMI); and Japan (industrial production, manufacturing PMI).
Year-to-date the markets are mixed: Dow -6.6%; S&P500 -3.4%; Nasdaq 1.9%.
The Markets for the past week were: DJIA up 1.1%; S&P500 up 0.9%; Nasdaq COMP up 2.6%.
Commodities (ETFs) for the past week were: Gold (GLD) down -2.19%; Silver (SLV) down -4.72%; Oil (OIH) up 9.55%; Dollar (UUP) up 1.21%; 30-year Bonds (TYX) rose 17 basis points to 2.91%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 26.05% reflecting slight decline concerning China after a drop in interest rates and further stimulus money.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is moderate:
o Monday – Chicago PMI, Dallas Fed Mfg Survey
o Tuesday – Motor Vehicle Sales, ISM Mfg Index, Construction Spending
o Wednesday – ADP Employment Report, Productivity and Costs, Factory Orders, Beige Book
o Thursday – Weekly Jobless Claims, EIA Petroleum Status Report, International Trade, ISM Non-Mfg Index
o Friday – Employment Situation
If you’re trading options, it is suggested trading Put and Call Credit spreads for next week at 2.5 standard deviations or greater. Expect the price of the SPX to fall within 1844 and 2142 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.