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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.

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