For the mid-week ending August 20, 2014, the markets have recovered from their losses of three weeks ago after the FOMC Minutes was released. Tensions between Ukraine and Russia have subsided as the presidents of both countries plan to meet next week. In Iraq, Kurdish troops and Iraqi special forces are on the offense after U.S. air strikes weakened ISIS.
The markets expected the Fed to express a growing hawkish position on the short-term rate hike, and they weren't disappointed. The markets initially dropped (as usual), but by the Close they were again approaching all-time highs.
Fueling the rally is the declining concern over Ukraine. The presidents of Ukraine and Russia are scheduled to meet next week as the pro-Russian rebels are being routed. At the moment, it seems that President Putin has decided against an invasion, seeking an alternative solution.
The Iraq situation with ISIS also appears to be improving, as the dam in Mosul has been recaptured by Iraqi special forces. The positive results of U.S. air strikes has the Pentagon calling for more (84 strikes have been conducted to date since August 8).
Economic news this week is good, with the housing sector showing growing strength and the consumer price index showing little inflationary pressure. The FOMC Minutes was as expected (a little more hawkish), indicating that short-term interest rates will likely occur mid-2015.
Geopolitical events (Ukraine, Iraq, Gaza) have eased currently, and the markets continue their rally to new highs. We will have to wait to see the results of the meeting next week between Ukraine and Russia; if it will yield a solution to the fighting.
For option traders, place Put credit spreads at 1.5 standard deviations. The expected price of the SPX at the close on Friday will fall within 1952-2020 (or 2 standard deviations).
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