For the week ending November 13, 2015, the six-week rally ended abruptly as both the Dow and the S&P 500 reversed direction ending in negative territory for the year. For this past week, the Dow dropped -3.7 percent; the S&P 500 dropped -3.6 percent. In other news: a December Fed rate hike looks nearly certain; IMF supports adding yuan to its SDR; and, the winners and losers of the TPP agreement. Below is a recap of the markets for each day of the week.
The markets were down on Monday on weak import and export data out of China. Oil ended lower at $44. The Dow dropped -1.0 percent to 17,731; the S&P 500 dropped -0.98 percent to 2,079.
On Tuesday, the markets were mixed on little economic data. Oil was flat at $44. The Dow dropped fractionally to 17,758; the S&P 500 rose 0.15 percent to 2,082.
The markets dropped on Wednesday on weak data out of China. Oil dropped $1 to $43. The Dow dropped -0.30 percent to 17,702; the S&P 500 dropped -0.32 percent to 2,075.
The markets dropped on Thursday in anticipation of a December Fed rate hike. Oil held at $43. The Dow dropped -1.4 percent to 17,447; the S&P 500 dropped -1.4 percent to 2,046.
On Friday, the markets took another sharp drop on mixed economic data (retail sales edged higher; producer prices remained very weak; consumer sentiment had a sharp gain). The Dow fell -1.2 percent to 17,245; the S&P 500 dropped -1.12 percent to 2,023.
Key economic reports from China (at the beginning of the week) and the Eurozone (at the end of the week) led the markets down after a six-week rally. China’s data was mostly a disappointment, and growth in the Eurozone was weaker than anticipated. The Dow declined -3.71 percent (665 points) for the week; the S&P 500 declined -3.63 percent (76 points) to 2,023. Adding to the decline was the increased possibility of a Fed rate hike in December and the poor earnings reports in the retail sector.
Economists overwhelmingly expect the Fed to raise rates in December. A poll conducted recently by the Wall Street Journal found that approximately 92 percent of economists (business and academic) believe the Fed will raise rates in December; 5 percent believe rates will rise in March; and, 3 percent believe rates remain unchanged for the foreseeable future. Fed Chair Janet Yellen said last week that a December rate hike is a “live possibility”. The federal-funds rate has been near zero since December 2008.
Managing Director Christine Lagarde of the International Monetary Fund (IMF) said she supports the inclusion of the yuan in its Special Drawing Rights (SDR) currency basket. The executive board will meet November 30 to render a decision. China has been pushing for the yuan to be included as part of its strategy to reduce its dependency on the dollar, and to reflect its stature as an economic power.
The winners and losers of the Trans-Pacific Partnership (TPP). The full text of the TPP was released earlier this month, and experts are weighing in on the impact. The most strident opposition to the TPP are industry groups and unions, along with presidential candidates from both sides. Experts, however, say that many businesses will benefit from the agreement, such as tech and telecommunications sectors. The most attractive item in the deal for tech firms is a clause that says: “No Party shall require the transfer of, or access to, source code of software owned by a person of another Party, as a condition for the import, distribution, sale or use of such software, or of products containing such software, in its territory.” The TPP also includes text that removes barriers to entry for Silicon Valley companies (and others) with clauses on comprehensive consumer and personal identification protection.
The bottom line: economic data this week did not increase the chances of a December rate hike: retail sales were soft, jobs data remains uneven, and inflation data continues to remain very low. Globally, China and the Eurozone both indicate a deflationary environment with little indication of economic growth.
The focus next week in the U.S. will be on manufacturing (Empire State report, industrial production, Philadelphia Fed Business Outlook) and housing (Housing market index, housing starts), including an update on inflation (consumer price index). The FOMC minutes will be released on Wednesday. Globally, in focus next week will be Japan’s GDP which is expected to show the country has slid into a technical recession (two successive quarters of contraction). In addition, the focus will be on the following: UK (Consumer Price Index, Producer Price Index, Retail Sales); eurozone (Harmonized Index of Consumer Prices, EC Consumer Confidence); Germany (ZEW Survey, Producer Price Index); China (nothing); and Japan (Gross Domestic Product).
Year-to-date the markets are mixed: Dow -3.2%; S&P500 -1.7%; Nasdaq +4.1%.
The Markets for the past week were: DJIA down -3.7%; S&P500 down -3.6%; Nasdaq COMP down -4.3%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.52%; Silver (SLV) down -3.48%; Oil (OIH) down -5.23%; Dollar (UUP) down -0.27%; 30-year Bonds (TYX) dropped 3 basis points to 3.06%.
The VIX this past week (a measure of market sentiment and volatility) rose to 20.08% reflecting the near certainty of a December rate hike, and the deteriorating 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 – Empire State Mfg Survey
o Tuesday – CPI, Industrial Production, Housing Market Index, Treasury International Capital
o Wednesday – Housing Starts, EIA Petroleum Status Report, FOMC Minutes
o Thursday – Weekly Jobless Claims, Philadelphia Fed Business Outlook Survey
o Friday – nothing
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 1917 and 2134 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.