For the week ending July 24, 2015, the markets retreated from all-time highs as earnings reports continue to disappoint. The Dow ended the week down -2.86 percent, and the S&P 500 ended down -2.21 percent. In other news: China’s sharp drop in manufacturing PMI elevates investor concerns; bailout talks with Greece hits a snag; commodity levels fell to their lowest level since 2002; weekly jobless claims at their lowest level since 1973; and the housing market is stabilizing as new home sales drop. Below is a recap of the markets for each day of the week.
The markets were up fractionally on Monday on little economic news. Oil fell $0.50 to $50.25. The Dow rose fractionally to 18,100; the S&P 500 rose fractionally to 2,128.
On Tuesday the markets dropped earnings on Dow components IBM and United Technologies. Oil rose $0.50 to $50.75. The Dow dropped -1.0 percent to 17,919; the S&P 500 dropped -0.43 percent to 2,119.
On Wednesday the markets dropped again on continued weak earnings news despite a very strong report on sales of existing homes. Oil dropped $1.70 to $49.05. The Dow dropped -0.38 percent to 17,851; the S&P 500 dropped -0.24 percent to 2,114.
The markets sharply dropped on Thursday on weak earnings reports from Caterpillar and 3M despite strong economic news: jobless claims dropped dramatically; and building permits up raising the index of leading economic indicators. Oil fell slightly to $49. The Dow dropped -0.7 percent to 17,731; the S&P 500 -0.57 percent to 2,102.
On Friday the markets continued to sharply drop on weak earnings reports and falling commodity prices. Oil dropped $1 to $48. The Dow dropped -0.9 percent to 17,568; the S&P 500 dropped -1.07 percent to 2,080.
The Dow turns red for the year amid mixed earnings and plummeting commodity prices. The biggest names in technology led the equity markets lower: Apple, Microsoft, and IBM; Amazon, however, surged after reporting a better-than-expected quarterly profit and revenue projection. European and Asian stocks ended in the red on Friday after a sharp selloff in global commodities (except for cocoa and cattle); demand is expected to remain weak leading to tepid growth in the next quarter. Since Thursday, U.S. air carriers have reported lower-than-expected revenue: American Airlines Group; Spirit Airlines; United Continental Holdings; and Southwest Airlines.
A sharp drop in China’s PMI surprised markets leading to increased investor concern and a selloff. The China Caixin PMI dropped to a 15-month low in July due to the recent crash and weak export demand. This report is in sharp contrast to China’s GDP report last week (7 percent growth) which calls into question the accuracy of China’s data. Concerns of a slowing economy have spurred the Chinese government to take action recently: the PBOC has cut interest rates and reduced the reserve requirement ratio. Last month the manufacturing PMI was 50.2; this month it is 48.2 (below the 50-mark separating growth from contraction).
Bailout talks between Greece and its creditors hits a snag. The 86 billion euro bailout talks ran into trouble when Greek Prime Minister Alexis Tsipras insisted on restrictions on negotiators, including whom they can meet with and the topics of discussion. Greek officials insisted that this was a temporary delay and talks would resume shortly. Greece and its creditors have already found common ground on a number of key points: fiscal targets; stabilizing the banking sector; liberalizing product markets and professions; reforms to the labor market; and privatization of state assets. Adding to the complication, Greece has also requested that the IMF begin discussions on a third bailout program. This means euro zone leaders may have to open new talks on granting significant debt relief far sooner than anticipated.
The slide in commodity prices could signal slowing global growth. The IMF cut its global growth forecast to 3.3 percent (from 3.5 percent) as the impact of the fall in oil prices on demand was only partially realized. With the changing Chinese market, the once soaring demand has now flattened out (or is declining) and this is causing commodity markets to decline as well. The composite manufacturing PMI in emerging market countries has dropped below 50 indicating contraction and possible long-term slowness in global growth. This can be reversed if the central banks continue their unprecedented monetary stimulus through quantitative easing. We’ll see how this plays out over the remainder of this year.
Weekly jobless claims has hit its lowest level since 1973. Claims declined 26,000 to 255,000 in which auto retooling and related temporary layoffs played a major role. This report will raise talk about an upward surge in the employment report due in two weeks. It remains to be seen if the drop in initial claims is simply due to temporary factors or a strengthening in employment.
The U.S. housing market has been hot this summer raising hopes that it will help drive economic growth. This, however, may be in jeopardy as new single-family home sales have fallen to a seven-month low for June. Sales of new homes account for only 8.1 percent of the housing market; existing home sales (which accounts for the bulk) has soared, jumping to an 8-year high.
The bottom line: the economy continues to slowly grow supported somewhat by the housing sector and a healthy labor market. It is still uncertain as to when a Fed rate hike will occur: either September or December; the July meeting next week is nearly certain to be a free pass for no action.
The focus next week in the U.S. will be on manufacturing (durable goods orders); housing (Case-Shiller; pending home sales); the consumer (consumer confidence); and the Fed (FOMC meeting, GDP). Globally the focus will be on the FOMC meeting in which there will be no policy move (bringing September’s meeting into focus for a rate hike). In addition, the focus will be on the following: UK (GDP); eurozone (EC economic sentiment, harmonized index of consumer prices); Germany (retail sales, unemployment rate); China (nothing); and Japan (retail sales, industrial production, consumer price index, household spending, unemployment rate).
Year-to-date the markets are mixed: Dow -1.4%; S&P500 +1.0%; Nasdaq +7.4%.
The Markets for the past week were: DJIA down -2.9%; S&P500 down -2.2%; Nasdaq COMP down -2.3%.
Commodities (ETFs) for the past week were: Gold (GLD) down -3.04%; Silver (SLV) down -1.48%; Oil (OIH) down -2.35%; Dollar (UUP) down -0.66%; 30-year Bonds (TYX) dropped 11 basis points to 2.97%.
The VIX this past week (a measure of market sentiment and volatility) rose to 13.74% due to poor earnings reports and a drop in global commodity prices.
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 – Durable Goods Orders, Dallas Fed Mfg Survey
o Tuesday – S&P Case-Shiller HPI, Consumer Confidence
o Wednesday – EIA Petroleum Status Report, Pending Home Sales Index, FOMC Meeting Announcement
o Thursday – Weekly Jobless Claims, GDP
o Friday – Employment Cost Index, Chicago PMI, Consumer Sentiment
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 2003 and 2158 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.