For the week ending August 14, 2015, the S&P 500 continues to remain range bound in anticipation of the September rate hike after recovering from the devaluation of the Chinese yuan three straight days. The Dow rose 0.6 percent for the week, and the S&P 500 rose 0.67 percent. In other news: U.S. flag raised as embassy reopens in Cuba; oil dropped to its lowest level since early 2009; and, the IMF urging Greece’s creditors to adopt a debt relief policy. Below is a recap of the markets for each day of the week.
The markets sharply rose on Monday on a $32 billion bid for Precision Castparts by Berkshire Hathaway. Oil rose $1 to $44.75. The Dow jumped 1.4 percent to 17,615; the S&P 500 rose 1.28 percent to 2,104.
On Tuesday, the markets dropped on a shock devaluation of the yuan emphasizing the weakness of China’s economy. Oil dropped $1.25 to $43.50. The Dow fell -1.2 percent to 17,402; the S&P 500 dropped -0.96 percent to 2,084.
On Wednesday, the markets were mixed as China’s devaluation of the yuan continued for a second day. Oil dropped $0.25 to $43.25. The Dow dropped fractionally to 17,402 after opening down -1.0 percent before an afternoon rally; the S&P 500 rose 0.10 percent to 2,086.
The markets were mixed on Thursday despite less concern over China, and solid economic news: strong retail sales; and a rise in business inventories. Oil dropped $1 to $42.25. The Dow rose fractionally to 17,408; the S&P 500 dropped -0.13 percent at 2,083.
On Friday, the markets were up on a strong industrial production report. Oil dropped fractionally to $42.23. The Dow rose 0.4 percent to 17,477; the S&P 500 rose 0.39 percent to 2,092.
Stocks had modest gains this week thanks to a strong rally on Monday, and a rally on Wednesday which overcame the morning’s steep decline. Tuesday and Wednesday morning saw steep declines as China devalued the yuan expectedly. Concern over a global currency war (after three days of unexpected devaluations) subsided on Friday after China raised the value of the yuan against the dollar by 0.05 percent. However, concerns remain that China’s economy is slowing more than expected, and only further cuts in the exchange rate will help China boost exports needed to stem the slide in GDP growth. The fear is that declining exports will spread to Japan as consumers cut back on spending across Asia. China is pushing for the yuan to join the reserve currency group (the SDR) of the IMF.
The dawn of a new era of relations with Cuba occurred Friday when the U.S. flag was raised at the reopening of the embassy in Cuba; the flag was lowered in 1961, approximately 54 years ago. U.S. Secretary of State John Kerry called for a political opening, saying that Cuba would best be served by a genuine democracy, where the Cuban people can choose their leadership through voting. This is the first time that a U.S. secretary of state has visited Cuba since 1945. Kerry said this would be good for both Cuba and the U.S.
The price of WTI crude oil has hit its lowest level since early 2009. Pundits believe oil will drop below $40 per barrel this year as the end of summer driving lowers demand and inventories begin to rise. Add to this the additional supply of oil from Iran as its refineries come back online, and supply-and-demand forces will likely push prices lower. With the slowdown in China’s economy negatively affecting commodity prices, some believe the price of oil could drop to $30 a barrel in the near future.
The IMF is in a geopolitical tug-of-war between the U.S. and Germany. As euro-zone finance ministers get ready to approve a new €85 billion ($95 billion) bailout plan for Greece, the IMF has made clear that the country’s debt burden is not sustainable and IMF rules do not allow the IMF to participate in lending money. Germany is criticizing the bailout plan as too lenient and insists that the IMF must sign off on the program (breaking IMF rules). The last time this happened was in 2010 (Greece’s first bailout) when pressure on the IMF forced it to break its rules. Will the IMF stick to its principles this time? The pundits feel that the answer is Yes now that there are divisions in Europe. The ECB and the European Commission both expressed concerns that Greece’s debt is not sustainable. And, while U.S. Treasury Secretary Jack Lew has endorsed debt relief for Greece, he wants Europe to contribute more of its own funds this time; a posture that will likely support the IMF’s position.
The bottom line: the auto sector has been a leading force pushing the economy moderately forward, with rising retail sales offsetting weakness in the energy sector and exports. With the drop in oil prices and the uncertain Chinese economy, there is still the likelihood that the FOMC in September could delay a rate hike.
The focus next week in the U.S. will be on housing with the home builder’s index, housing starts, and existing home sales. Globally the focus will be on manufacturing PMIs in China, Japan, the eurozone, Germany, and France. In addition, the focus will be on the following: UK (CPI, PPI, retail sales); eurozone (merchandise trade balance, EC Consumer confidence, composite PMI); Germany (PPI, composite PMI); China (manufacturing PMI); and Japan (GDP, merchandise trade balance, manufacturing PMI).
Year-to-date the markets are mixed: Dow -1.9%; S&P500 +1.6%; Nasdaq +6.6%.
The Markets for the past week were: DJIA up 0.6%; S&P500 up 0.7%; Nasdaq COMP up 0.1%.
Commodities (ETFs) for the past week were: Gold (GLD) up 2.10%; Silver (SLV) up 3.12%; Oil (OIH) up 1.14%; Dollar (UUP) down -1.10%; 30-year Bonds (TYX) rose 1 basis points to 2.84%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 12.83% due to a slight decline in the probability of a rate hike in September and a modest gain in the S&P 500.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is light:
o Monday – Empire State Mfg Survey, Housing Market Index, Treasury International Capital
o Tuesday – Housing Starts
o Wednesday – EIA Petroleum Status Report, Consumer Price Index, FOMC Minutes
o Thursday – Weekly Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales
o Friday – PMI Manufacturing Index Flash
If you’re trading options, it is suggested trading Put Credit spreads for next week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 2015 and 2171 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.