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Archive for August, 2015

Weekly Market Update – August 28, 2015

It was a wild ride in the stock market this week with the S&P 500 and Dow starting Monday with their worst one-day performance since 2011 with a negative 3.94% and 3.57% performance, respectively.  The market routing continued Tuesday, before a springboard recovery took hold Wednesday and Thursday to propel the market to a positive weekly performance with the S&P500 and Dow closing up 0.91% and 1.11%, respectively.  Friday’s market action stabilized after a weeklong display of significant volatility, with the S&P500 and Dow finishing relatively flat on the day.

Global growth concerns stemming from China’s recent economic slowdown and the precipitous drop in its regional stock markets has investors on the edge of their seats.  Up until Wednesday, China’s policy efforts to support its markets, which included an interest rate cut, the pledge of state owned enterprise to buy equities, and the ban of short selling, had proved ineffective.  On Wednesday, China’s government through its Central Bank, upped the ante by promising the financial entities $21.8 billion in short term loans to improve liquidity and stabilize funding costs among its banks. 

Though markets around the world reacted positively to this measurement, this quick recovery came with a great economic cost.  The Chinese government has been explicit about the necessity of transitioning its economy from saving and investment to a more sustainable consumption driven economy that is less dependent on government intervention.  Wednesday’s intervention illustrates that the Chinese economy is struggling with this transition.  Furthermore, the intervention invites the occurrence of moral hazard or the encouragement of risky behavior with the expectation that the government will intervene and bail out the reckless parties.  Given the Chinese Government’s actions, they must have felt the short term benefits of the liquidity injection outweighed the long term risks of future potential bailouts.

Despite the recent stock market volatility, U.S. fundamental macro-economic data was impressively positive this week.  On Wednesday, Durable Goods Orders, an important proxy for manufacturing activity, blew past expectations of -0.6% with a reading of 2.0% for the month of July.  On Thursday, Initial Jobless claims were lower than expected and the second estimate of Q2 GDP was revised upwards from 2.3% to 3.7% which was even higher than the market expectations of 3.1%.  While the GDP revision is a lagging economic indicator, it suggests that the U.S. economy was carrying much stronger momentum into Q3 than was initially expected.  These positive economic developments assisted oil’s price recovery this week as the price for one barrel of WTI oil jumped from $38.24 on Monday to $45.38 at the close on Friday for a weekly gain of 18.7%.

Important economic data points and events next week include the Chicago Purchasing Manager’s Index on Monday, the Fed’s Beige Book for the month of September on Wednesday, and Non-Farm Payrolls and Unemployment Rate data for the month of August.  The net new jobs created in August will be critical in evaluating the future of U.S. interest rate movements.

Weekly Market Update – August 21, 2015

Continued poor economic data out of China coupled with a surprise resignation from former Greek Prime Minister Alexis Tsipras threw the market into a tailspin this week with the Dow and S&P 500 falling 5.82% and 5.77%, respectively.  Friday’s market is largely responsible for the red week with the Dow and S&P 500 down 3.12% and 3.19%, respectively.

The turmoil intensified Friday as China’s Purchasing Managers’ Index, a proxy for manufacturing conditions in the country, fell to 47.1, compared to expectations of 47.7.  This is the lowest it’s been in 77 months.  For reference, any reading below 50 signals a contraction and seems to validate concerns of an economic slowdown in a country that has been a consistent global economic engine for the past 30 years.  This slowdown has also manifested itself in the commodity markets with the prices of oil, copper, and steel significantly below their 5 year average.  As a result, the market had its worst weekly showing in four years.

Panic across the global markets induced a flight to the safety of U.S. Treasuries.  The 10-year Treasury, often a helpful tool in the analysis of market conditions and an important indicator of future interest rates, fell 3 basis points to a rate of 2.05%.  This is significantly lower than the peak rate of 2.48% achieved over the past 3 months, and the reasons for this are twofold.  Naturally, many investors, in an effort to reduce their exposure to risk, in the U.S. or abroad, sold securities and reinvested the proceeds in the 10-year Treasuries, which are viewed as a securities without principal risk.  The increased demand drove the price for these securities up, and consequently the yield or rate down.

The second reason for the decline in the 10-Year Treasury rate can be explained by the reduced likelihood of the Fed increasing U.S. interest rates.  Before this week’s poor performance, many analysts felt that the Fed might signal their intention to raise interest rates come September.  While there is still a chance that they do, the likelihood has certainly diminished after this week.  With the threat of a global economic slowdown and the strengthening of the U.S. Dollar as a result of the demand for the U.S. Treasuries, it is difficult to envision the Fed raising rates in the near term, which reduces the interest rate risk faced by fixed income investors.

Important economic data out next week that may help to right the economic ship include the U.S. Consumer Confidence reading for August on Tuesday, the Second Estimate for Q2 U.S. GDP, which is expected to be revised higher from 2.3% to 3.1%, and the Michigan Consumer Sentiment reading for August on Friday.

Weekly Market Update – August 14, 2015

The Dow rose 69 points Friday to finish the week up .6%.  For the year the index is now down 2.0%.

US economic data released Friday showed July industrial production (factory output) exceeded expectations, as did the Producer Price Index (PPI), which rose .2%  in July, a data point that may give the Fed additional ammunition to justify an interest rate increase in September.  Consumer confidence fell slightly from July’s level.

Across the pond, Eurozone Q2 GDP came in below expectations (.3% Q/Q vs. estimates of .4%) while in Greece, the government won parliamentary approval for the country’s new bailout program.  The package passed easily but almost one third of Syriza’s party members abstained or voted no. Prime Minister Alexis Tsipras is expected to call a confidence vote next week, which could lead to snap elections in September and a new government if his current government fails to secure the required support.

The yield on the 10-year Treasury rose 1bps to 2.20%, up 3 bps for the week and the same for the year.  Through Thursday, August 13, our trust preferred portfolios were up approximately 1.50%, on average, year-to-date, versus .55% for the Barclays Aggregate Bond Index. 

Oil fell as low as $41.35 per barrel Friday (a fresh six-year low) but recovered to end the day at $42.50.  Concerns about oversupply and weak Chinese demand continue to pressure the commodity.

Next week’s economic calendar highlights include July housing data on Tuesday and Thursday, inflation data on Wednesday and weekly jobless claims on Thursday.  Expect the housing data (housing starts and existing home sales) to show a slight decrease in activity from June, inflation to remain in check and weekly jobless claims to again fall in the 270-280,000 range (from 274,000 this week).

 

Weekly Market Update – August 7, 2015

The Dow fell 46 points Friday on the heels of the July jobs report and a further decline in oil prices.  For the week the Dow was down 1.8% and for the year the index is now down 2.6%.

The July jobs report showed the addition of 215,000 jobs in the month, slightly below expectations and June’s 231,000 number, which was upwardly revised.  The unemployment rate remained unchanged at 5.3% while hourly earnings rose .2% year-over-year.  Monthly job growth has averaged just over 211,000 this year, a pace which continues to favor the odds of an interest rate hike by the Fed later in the year, most likely in September.  The Fed’s next policy meeting is September 16 & 17.

The yield on the 10-year Treasury fell 6 basis points Friday to 2.17%, down 4 bps for the week and now flat for the year.  Through Thursday, August 6, our trust preferred portfolios were up approximately 1.75%, on average, year-to-date, versus .42% for the Barclays Aggregate Bond Index. 

Oil fell 79 cents to $43.87 Friday, closing below $44 for the first time since March and near its six-year closing low of $43.46.  Pressuring oil was the latest rig count report which showed the addition of 6 drilling rigs this week.  The rise of the dollar after the US jobs report was released and continued concerns about additional Iranian oil flooding the market also weighed on pricing.  

Next week’s economic calendar highlights include weekly jobless claims and July retail sales on Thursday and inflation, July manufacturing and consumer confidence reports on Friday.  Expect weekly jobless claims to fall in the 270-280,000 range (from 273,000 this week), July retail sales to be slightly stronger than in June, inflation to remain in check, the manufacturing report to show an uptick in activity from June and consumer confidence to fall slightly.

 

Ulland Investment Advisors

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