For the week ending October 3, 2014, the markets have been experiencing greater volatility as we come closer to the end of QE3. October, historically known for market corrections, has increased the sensitivity of investors to economic, national (Ebola) and geopolitical events (Hong Kong). Below is a recap of the markets for each day of the week.
The markets retreated on Monday following the worst week in two months. News and events that weighed on the markets: the protests in Hong Kong and its implications for China; and a rebound in consumer spending raising concerns of a Fed rate hike sooner than anticipated. The Dow dropped -0.3 percent (after being down over -1.1 percent in the morning).
On Tuesday the markets continued their decline as the third quarter came to a close. News affecting the markets: consumer confidence dropped sharply (especially for income and jobs outlook); concern over China’s response to the ongoing Hong Kong demonstrations; housing data (Case-Shiller) showed a significant drop in home prices; and weak inflation data out of Europe leading to a prolonged low interest rate environment (this causes the dollar index to rise which puts pressure on exports). The Dow ended down -0.2 percent.
On Wednesday, the markets began the new quarter by dropping to their lowest levels since mid-August. News affecting the markets: poor economic data (ISM Mfg Index came in below expectations; construction spending slipped -0.8 percent; Germany’s manufacturing PMI dropped for the first time in 15 months with a reading of 49.9) and the first reported case of Ebola in the U.S.. The Dow dropped a significant -1.4 percent.
The markets were volatile on Thursday amid national and geopolitical events. News affecting the markets: reports of a wider Ebola exposure in Dallas; warnings from China of a crackdown on Hong Kong protesters; and a very good jobless claims report. The Dow recovered with a late day rally ending fractionally down.
On Friday, the markets staged a strong rally wiping out a large portion of the losses for the week. News affecting the markets: the September employment situation data showed an unexpectedly strong jobs growth (248,000 actual vs. 215,000 expected) and a lower than expected unemployment rate (5.9% actual vs. 6.1% expected). The Dow jumped 1.2 percent ending above 17,000 again.
This past week was volatile, with the ending of the third quarter and the start of October. Economic news was mixed, but the highlight was the very favorable employment situation report. The economy continues to expand at a moderate pace, but consumer confidence has dropped as housing stalls.
The first reported case of Ebola (in Dallas, Texas) has the country nervous (let alone investors). It has been reported that the man found positive for the virus may have infected as many as ten others. U.S. health officials have quarantined the ten people who came into contact with the Liberian man diagnosed with Ebola; another fifty people who had indirect contact are being observed. Meanwhile, another possible Ebola case has turned up in Washington, DC; as a result, the House Appropriations Committee has set a deadline of October 17 for the Whitehouse to provide details on a plan to address this serious health issue.
The pro-democracy demonstrations in Hong Kong continue despite a warning to ‘clear out before Monday or else’. This ultimatum was issued by the city’s leader Chief Executive C.Y. Leung (whose resignation protestors have been demanding). The pro-democracy activists are asking for universal suffrage and the right to choose candidates for elected office (China currently chooses who can run). A recently enacted policy, giving veto power to Beijing for candidates running in 2017 for chief executive, ignited the recent demonstrations. Beijing condemns the protests as “illegal acts”.
The bottom line: concern over the disappointing data from Japan and the slight contraction in the EU have been partly offset by continued slow growth in the U.S.. Investor expectation for a correction has increased and is reflected in the large moves experienced this past week.
Globally, the ECB and the Reserve Bank of India have left their monetary policies unchanged. Economic data has been mixed, with the flash harmonized index of consumer prices slipping to a very low 0.3 percent for September.
In the U.S., economic expansion continues as volatility rises due to a drop in consumer confidence and concerns of a correction this month. The most recent Fed policy statement indicates that the debate on the timing of the rate increase has heated up. Manufacturing continues to rise while housing has again stalled.
The focus next week in the U.S. is the FOMC Minutes (which could add insight on the interest rate timing debate) and the JOLTS report (which could confirm the jobs report).
Year-to-date the markets are up: Dow 2.6%; S&P500 6.5%; Nasdaq 7.2%.
The Markets for the past week were: DJIA down -0.6%; S&P500 down -0.8%; Nasdaq COMP down -0.8%.
Commodities (ETFs) for the past week were: Gold (GLD) down -2.09%; Silver (SLV) down -4.62%; Oil (OIH) down -6.95%; Dollar (UUP) up 1.23%; 30-yr Bonds (TYX) dropped 9 basis points to 3.13%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 14.55% as bargain hunting on Friday led to a major rally.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is light: on Monday – nothing; on Tuesday – JOLTS; on Wednesday – Weekly EIA Petroleum Status Report, FOMC Minutes; on Thursday – Weekly Jobless Claims; and Friday – Treasury Budget.
If you’re trading options, we suggest Put Credit spreads for next week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 1890 and 2048 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.