For the week ending August 21, 2015, the Dow and S&P 500 went through the largest weekly decline since 2011 (and the biggest 2-day drop since 2008) on concerns that the economic slowdown in China will negatively impact global growth and commodity prices. The Dow dropped -5.8 percent for the week, and the S&P 500 dropped -5.8 percent. In other news: global investors were spooked Friday by China’s factory slump; Fed rate hike in September is not likely; and, oil prices hit 6-year low. Below is a recap of the markets for each day of the week.
The markets rose on Monday on mixed economic news: Empire State signaled major weakness for the factory sector; and, the housing market index posted its highest reading since late 2005. Oil dropped $0.20 to $42. The Dow rose 0.4 percent to 17,545; the S&P 500 rose 0.52 percent to 2,102.
On Tuesday the markets dropped on mixed housing starts vs. permits: housing starts solidly rose, while housing permits (which lead housing starts) came in weak. Oil rose slightly above $42. The Dow fell -0.2 percent to 17,511; the S&P 500 fell -0.26 percent to 2,097.
On Wednesday the markets dropped after an initial jump in reaction to the FOMC minutes released in the afternoon in which nearly all members are against a rise in interest rates in September. The Dow dropped -0.9 percent to 17,348; the S&P 500 dropped -0.83 percent to 2,080.
The markets dropped on Thursday despite good economic news on rising concerns that the economy may not be strong enough for a September rate hike. Oil dropped to $40.75 (a 6-year low). The Dow dropped sharply -2.1 percent to 16,990; the S&P 500 dropped sharply -2.11 percent at 2,036.
On Friday panic swept the markets due to continued weakness in China’s economy and emerging markets. Oil dropped $0.50 to $40.29. The Dow dropped sharply -3.1 percent to 16,459; the S&P 500 dropped sharply -3.19 percent to 1,971.
U.S. stocks had their biggest weekly decline since 2011, and their biggest single-day decline in 18-months. Thursday and Friday also marked the largest 2-day decline since 2008. China’s weakness is rippling across global markets, but the Brazilian economy (which is in shambles) and the Russian economy (falling further into a recession) are increasing investor concerns as well. U.S. economic growth is now expected to be around 2 to 2.5 percent for the third quarter. While the markets are reacting to global uncertainty, the U.S. economy is expected to continue with slow growth and relative stability.
A slump in China’s factory orders spooked the markets on Friday. China’s factory sector fell at its highest pace in August since 2011 due to a decline in both domestic and export demand. The surprise devaluation of the yuan followed by deep declines in its stock markets in the last few weeks have increased fears that it could deeply affect world growth. Further weakness in China’s economy is expected as the true value of its GDP is likely to be lower than the 7 percent reported.
A Fed rate hike in September (or even December as well) seems far less likely as weakness in global economies are impacting the U.S. markets and its economy. The FOMC minutes released last Wednesday showed that most of the members are in favor of delaying a rate hike till either December, or some time in 2016; they believe further information on the outlook of the U.S. economy will be needed before a decision can be made. The current probability for a September rate hike is now at 34 percent (down from 50 percent).
U.S. oil prices have now reached a 6-year low, dipping below $40 a barrel (WTI) for the first time since 2009. The expectation by analysts is that prices could decline further and the average price of oil will remain below $60 a barrel through 2016. The drop in oil prices has sent energy stocks sharply down which is weighing negatively on global market indexes. Analysts are saying that a long period of low prices will be needed to convince energy companies to reduce expansion and lower production enabling the sector to self-correct; it will also convince consumers to spend the savings from lowered gas prices, rather than put it into savings.
The bottom line: declining commodity prices along with the recent chaos in the stock and currency markets, point to a delay in the Fed rate hike beyond September. While housing remains strong, manufacturing is weakening and there is no sign of inflation growth; a rate hike in September has just become more risky for the economy.
The focus next week in the U.S. will be on housing (FHFA; Case-Shiller, new home sales, pending home sales), GDP, and the core PCE price index. Globally the focus will be on GDP. In addition, the focus will be on the following: UK (GDP); eurozone (M3 money supply, EC consumer & business confidence); Germany (GDP, retail sales); China (nothing); and Japan (household spending, unemployment, retail sales, CPI).
Year-to-date the markets are down: Dow -7.6%; S&P500 -4.3%; Nasdaq -0.6%.
The Markets for the past week were: DJIA down -5.8%; S&P500 down -5.8%; Nasdaq COMP down -6.8%.
Commodities (ETFs) for the past week were: Gold (GLD) up 4.01%; Silver (SLV) up 0.41%; Oil (OIH) down -9.83%; Dollar (UUP) down -1.74%; 30-year Bonds (TYX) dropped 10 basis points to 2.74%.
The VIX this past week (a measure of market sentiment and volatility) rose dramatically to 28.03% reflecting growing concerns over China and the global economy.
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 – nothing
o Tuesday – New Home Sales, S&P Case-Shiller HPI
o Wednesday – EIA Petroleum Status Report, Durable Goods Orders
o Thursday – Weekly Jobless Claims, GDP
o Friday – Personal Income and Outlays, Consumer Sentiment
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 1822 and 2128 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.