For the week ending May 29, 2015, the markets were down with the Dow off -0.7 percent and the S&P 500 off -0.9 percent. It was a choppy week due to mixed economic data, the Greek debt problem, and wavering growth in China. With equities near their all-time highs, investors are nervous with daily volume very low. Below is a recap of the markets for each day of the week.
The markets were closed on Monday for Memorial Day.
On Tuesday the markets dropped precipitously on improving economic news: durable goods orders is showing improvement in the factory sector; the Case-Shiller HPI is hinting at strength in the second quarter; new home sales solidly rebounded with a 6.8 percent gain; and consumer confidence continues to run at a historic level at 95.4 (up from a revised 94.3 in the prior month). Oil dropped $2 to $58.25. The Dow dropped -1.0 percent to 18,041; the S&P 500 dropped -1.03 percent to 2,104.
On Wednesday the markets bounced back making up nearly all of yesterday’s loss on little economic news. Oil dropped $0.50 to $57.75. The Dow rose 0.7 percent to 18,162; the S&P 500 rose 0.92 percent to 2,123.
The markets dropped on Thursday due to strong economic news: a big gain in pending home sales; and another decline in jobless claims. Oil rose slightly to $58. The Dow fell -0.2 percent to 18,126; the S&P 500 fell -0.13 percent to 2,121.
On Friday the markets dropped again on mixed economic news: GDP went negative (-0.7 percent) indicating a contraction in growth; Chicago PMI dropped to 46.2 (below 50 indicates a contraction); and consumer sentiment rose to a strong 90.7. Oil rallied over $2 to $60. The Dow dropped -0.60 percent to 18,010; the S&P 500 dropped -0.63 percent to 2,107.
Economic news this past week shows some encouraging strength for the second quarter, increasing investor expectations for a Fed rate hike in September (rather than early 2016). Volume was generally very light, except on Tuesday when the markets dropped around -1 percent after the Memorial Day weekend. This was the biggest decline in three weeks, following remarks by Fed Chairperson Janet Yellen preparing investors for a rate-hike later this year.
The U.S. and Japan pressed Greece and its creditors to resolve the debt crisis and avoid a default and consequential exit from the EU. Time is running out as the next debt repayment by Greece is due June 5. Reaching a deal with its international creditors will release the next tranche of 7.2 billion euros ($7.9 billion). Treasury Secretary Jack Lew says Europe is courting disaster with the debt crisis, and encourages the parties to find an agreement for more financial help for Greece. Mixed signals from the Greek government and its creditors has led to choppiness in the markets this past week, including whether a “Grexit” is possible. If Greece left the EU, then the stability of the EU monetary system will be called into doubt.
As China’s economic growth slows, President Xi Jinping calls for innovation to spur the economy. Xi visited the eastern province of Zhejiang (located just outside of Shanghai) to drum up popular support for his message. Also, as head of the armed forces, Xi visited with provincial military leaders and told them to “track and guide troops’ ideological thinking and teach them to obey the command of the Communist Party of China” as well as “hone the troops’ abilities to fulfill tasks and maintain readiness to fight.” Here in the U.S., former Fed Chairman Ben Bernanke stated that the slowing growth in China is inevitable and desirable. Bernanke said “China can no longer grow based on its traditional model of exports, heavy industry and construction. It has to liberalize, and it’s in that process.” Risks remained in the Chinese system, said Bernanke, and he offered as an example Chinese banks that expanded credit by making risky loans to regional governments and state-owned enterprises. Bernanke believes China is big enough to whether the financial storm, but it is geopolitical shocks that could derail the global economy (including China’s economy).
The bottom line: if housing can continue to build momentum to offset weakness in manufacturing, and consumer spending matches consumer confidence, then a rebound in economic growth is likely to occur for the second quarter; and this growth is likely to convince the Fed to implement a rate hike this year.
The focus next week in the U.S. will be on Friday’s employment report; if it reports a modest 220,000 nonfarm jobs, then the Fed will likely raise rates in September. Prior to Friday, other job reports that will impact market expectations are: ADP employment report (Wednesday); and jobless claims (Thursday). Motor vehicle sales (Tuesday) will provide hard consumer data. Globally the slew of first quarter data proved that global growth slowed. The focus will be on the following: UK (BoE Monetary Policy; manufacturing PMI); eurozone (ECB monetary policy; harmonized index of consumer prices; services and composite PMI; retail sales; unemployment; GDP); Germany (manufacturing PMI; services and composite PMI; manufacturing orders); China (manufacturing PMI); and Japan (manufacturing PMI).
Year-to-date the markets are up: Dow 1.1%; S&P500 2.4%; Nasdaq 7.1%.
The Markets for the past week were: DJIA down -1.2%; S&P500 down -0.9%; Nasdaq COMP down -0.4%.
Commodities (ETFs) for the past week were: Gold (GLD) down -1.30%; Silver (SLV) down -2.14%; Oil (OIH) down -3.17%; Dollar (UUP) up 0.17%; 30-year Bonds (TYX) dropped 14 basis points to 2.85%.
The VIX this past week (a measure of market sentiment and volatility) rose to 13.84% due to increased concerns over the Greek debt crisis and expectations for a Fed rate-hike in September.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full:
o Monday – Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg Index, Construction Spending
o Tuesday – Motor Vehicle Sales, Factory Orders
o Wednesday – ADP Employment Report, International Trade, ISM Non-Mfg Index, EIA Petroleum Status Report, Beige Book
o Thursday – Weekly Jobless Claims, Productivity and Costs
o Friday – Employment Situation
If you’re trading options, it is suggested trading Put Credit spreads for next week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 2027 and 2190 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.