For the week ending September 19, 2014, the markets resumed making new highs (except the Russell 2000) after the FOMC and Scotland vote. As the conflict with ISIS continues to grow, the crisis in Ukraine continues to subside. Below is a recap of the markets for each day of the week.
The markets were little changed on Monday following mixed economic news. Industrial production was down in August (-0.1% actual vs. 0.3% expected), most likely due to retooling of auto plants. The Empire State manufacturing survey rose sharply (27.54 actual vs. 15.9 expected) primarily due to shipments; employment growth slowed and new orders are up slightly.
On Tuesday the markets rallied on good economic news. The producer price index (PPI-FD) came in as expected (0.0%) easing inflation concerns which is a positive for the FOMC doves.
On Wednesday, the markets continue to rise due to the slightly dovish FOMC announcement which retained the words “considerable time” in its policy statement. The Fed also commented that the economy is moderately expanding and inflation remains below its desired level.
The Dow and S&P 500 both closed at record highs on Thursday after a sharp decline in initial jobless claims (280k actual vs. 305k expected). Continuing claims also dropped significantly (down 36k vs. up 12k prior week).
On Friday, the markets were mixed on quadruple witching and the “no” vote for Scottish independence (which initially sent the markets up). Helping support stocks was the IPO for Alibaba (the largest historically) while the downside came from the energy sector.
With the markets near all-time highs (except the Russell 2000 which dropped significantly for the third consecutive week), the focus will be on the effect of QE3 ending late October; expectations are a significant correction based on prior QEs.
The Fed on Wednesday renewed its pledge to keep interest rates at current levels for a “considerable time”. However, the Fed stated that it could raise borrowing costs at a faster than expected pace once initiated. New quarterly projections in future years show the Fed diverging from market expectations.
The independence vote in Scotland is in, and the response is NO. However, its defeated leader Alex Salmond said he would hold London to last minute offers of increased power for Scotland that could dramatically alter England. The final vote: 55 percent NO; 45 percent YES.
The situation with ISIS continues to escalate as Syrian Kurds warn of ISIS advances and the taking of more villages. The ISIS advance has led to a significant portion of north-central Syrian Kurdish region under fire, which could lead to another humanitarianism crisis. Nearly 4 thousand Kurds fled to the Turkish border which was finally opened; there are around 815 thousand Syrian Kurds now registered in Turkey.
The U.S. Senate on Thursday voted overwhelmingly to allow arming moderate Syrian rebels to fight ISIS. The measure, which was passed by the House on Wednesday, now goes to President Obama for his signature. Many Democrats, after the midterm elections, expect a broad debate on legislation to place constraints
The bottom line: the Scots voted to remain with the UK; the Swiss National Bank left its policy interest rate unchanged; economic data from the UK indicates the following: economic growth continues while unemployment declines; and retail sales are increasing while consumer and producer prices are not showing signs of increasing.
In the U.S., the economy continues to improve moderately; housing starts are disappointing; the housing index continues to rise; home price appreciation has softened; and inflation appears to be inching upward, but still below the Fed’s goal.
The focus next week in the U.S. is housing and manufacturing. Existing and new home sales will be watched, along with the FHFA house price index. On the manufacturing side, the durable goods report will add clarity to the data received last week.
Globally the focus will be on the flash manufacturing PMIs for the Eurozone, China, Japan, and the U.S.. Japan will be releasing its August consumer price index, which will be reviewed for signs of inflation.
Year-to-date the markets are up: Dow 4.2%; S&P500 8.8%; Nasdaq 9.7%.
The Markets for the past week were: DJIA up 1.7%; S&P500 up 1.3%; Nasdaq COMP up 0.3%.
Commodities (ETFs) for the past week were: Gold (GLD) down -1.09%; Silver (SLV) down -3.91%; Oil (OIH) down -0.81%; Dollar (UUP) up 0.62%; 30-yr Bonds (TYX) dropped 7 basis points to 3.28%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 12.11% as both FOMC rate hike concerns and geopolitical issues dropped. The markets are vulnerable to news risk, with implied volatility still so low and the ending of QE3.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is moderate: on Monday – Existing Home Sales; on Tuesday – PMI Manufacturing Index Flash; on Wednesday – Weekly EIA Petroleum Status Report, New Home Sales; on Thursday – Weekly Jobless Claims, , Durable Goods Orders; and Friday – Consumer Sentiment, GDP.
If you’re trading options, we suggest Put Credit spreads for next week at 1.5 standard deviations or greater. Expect the price of the SPX to fall within 1944 and 2079 (2 standard deviations).
For more information about options, see the ‘Suggested by the author’ links below.