For the week ending October 10, 2014, the markets have been experiencing large swings due to news based algorithmic program trading. With little economic news this past week, algorithmic programs focused on negative news and Ebola news has driven the markets down. Also, concern over the prospect of a widespread economic slowdown in Europe and Asia has added fuel to the downturn in the markets. Below is a recap of the markets for each day of the week.
The markets dropped fractionally on Monday on little economic news. Non-economic news included the ‘fizzling out’ of Hong Kong’s democracy demonstrations and the first Ebola case in Spain (a nurse in Madrid who cared for Ebola patients).
On Tuesday the markets experienced a significant decline as a big drop in German industrial production lowered the outlook for the EU economy. Fueled by a drop in consumer credit data here in the U.S., the Dow dropped -1.6 percent to 16,719.
On Wednesday, the FOMC Minutes showed concern that the strength in the dollar is pulling down inflation (which is below target). This sparked a big selloff in the dollar which caused a major rally in the markets. The Dow rose 1.6 percent to 16,993.
The markets strongly retreated on Thursday despite good economic news (strong decline in jobless claims). News based algorithmic programs dominated the trading activity, bring the Dow down -2.0 percent to 16,659 (ending on session lows).
On Friday, the markets traded in a broad range before selling off at the close. The Dow ended lower by -0.7 percent to 16,544. Micron Technology warned about a drop in future earnings, sending technology stocks lower. Economic news for the day showed broad declines for import and export prices which underscores the FOMC report on Wednesday.
The biggest economic news this past week was the dovish tone of the FOMC Minutes followed by a very positive JOLTS report. But limited economic news, in concert with Ebola and declining economic growth in Europe and Asia, has led equities tumble over 3 percent; led primarily by program trading.
The anxiety over Ebola in the U.S. rises as a healthcare worker in Dallas tested positive for Ebola virus. The worker, who cared for the Liberian man (Thomas Duncan) who died from the virus, was employed by the Texas Health Presbyterian Hospital in Dallas. Chief clinical officer, Dr. Daniel Varga, told reporters that the healthcare worker came into contact with the infected Mr. Duncan in the emergency room while wearing an approved “gown, glove, mask and shield” as per C.D.C precautionary guidelines.
The first case of Ebola in Spain has also added to investor anxiety. An assistant nurse, Teresa Romero, tested positive earlier in the week but is now showing signs of “slight improvement”. A committee from the European Centre for Disease Prevention and Control concluded that the situation in Spain is not considered an Ebola outbreak.
Fears of a global economic slowdown, along with geopolitical concerns (airstrikes in Syria targeting ISIS), are also blamed for the drop in markets worldwide. This past week has seen the ” biggest weekly US outflow from European stocks in two months and total European assets held by US funds have dropped to $40bn (£25bn) down from nearly $50bn in June, according to Lipper data”. The IMF (International Monetary Fund) has cut its global economic growth forecasts for this year to 3.3 percent (from 3.7 percent). The IMF considers its 2015 predictions of 3.8 percent may be too optimistic.
The bottom line: the limited economic news this past week in the U.S. shows a slowly improving labor market and weak inflation. This data will encourage the Fed to delay any rate increase action till mid- or late 2015.
Globally, equities tumbled on fears of a global economic slowdown. Both the FTSE and DAX reached lows not seen since nearly a year ago. The biggest economic data to disappoint was Germany, in which the possibility of a recession has increased.
The focus next week in the U.S. will be on the consumer sector (Retail Sales; Consumer Sentiment), manufacturing (Industrial Production, PPI-FD), and Housing (Housing Starts; Housing Market Index).
Year-to-date the markets are mixed: Dow -0.20%; S&P500 3.1%; Nasdaq 2.4%.
The Markets for the past week were: DJIA down -2.7%; S&P500 down -3.1%; Nasdaq COMP down -4.5%.
Commodities (ETFs) for the past week were: Gold (GLD) up 2.60%; Silver (SLV) up 3.23%; Oil (OIH) down -6.52%; Dollar (UUP) down -0.95%; 30-yr Bonds (TYX) dropped 11 basis points to 3.02%.
The VIX this past week (a measure of market sentiment and volatility) rose to 21.24% as fears over global economic slowdown, Ebola, and news driven algorithmic programs drove the markets down significantly.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full: on Monday – nothing; on Tuesday – nothing; on Wednesday –PPI-FD, Retail Sales, Empire State Mfg, Business Inventories, Beige Book; on Thursday – Weekly Jobless Claims, Industrial Production, Philadelphia Fed Survey, Housing Market Index, Weekly EIA Petroleum Status Report; and Friday – Housing Starts, Consumer Sentiment.
If you’re trading options, we suggest Put Credit spreads for next week at 2 standard deviations or greater. Expect the price of the SPX to fall within 1798 and 2019 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.