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Weekly market recap: European contagion hits U.S. markets

European contagion hits U.S. markets
European contagion hits U.S. markets
Photo by John Moore/Getty Images

For the week ending July 12, 2014, although there was little economic news, the markets dropped this week due to profit taking from record highs and a major bank default in Europe. In the interim, the FOMC Minutes revealed part of the Fed's exit strategy.

During the first two days of the week, the markets dropped as traders, nervous about the Fed raising rates sooner than expected, took profits after the prior week's record highs. And, with earnings season just starting, caution prevailed prior to the FOMC Minutes.

The markets responded positively to the FOMC Minutes. The minutes revealed the exit strategy for quantitative easing (QE): end QE by October with a reduction of $15 billion (the remaining balance). The Fed also indicated that interest rates will not be raised prior to mid 2015. The markets rallied on this news Wednesday.

The European markets dropped precipitously on news that one of Portugal's biggest non-state banks, Banco Espirito Santo, was on the brink of default. Shares in Espirito Santo Financial Group (ESFG), the largest shareholder, were suspended on the Lisbon and Luxembourg stock exchanges, along with bonds issued by its subsidiary. Moody slashed its credit rating from B2 to Caa2 .

The U.S. markets reacted on Thursday with the S&P futures opening over 20 points down; the European contagion reminiscent of 2011 . But prior assurances from the ECB that it will bail-out any major bank failures eased investor concerns, and the S&P index ended the day down slightly over 8 points, filling the gap.

The bottom line is: the Fed is staying on track with tapering and interest rates are likely to remain low till mid 2015; the economy continues to show improvement, especially the consumer sector.

The focus next week in the U.S. covers many sectors, with specific attention to the consumer, manufacturing, and housing. Retail sales, which slowed in May, may see an increase due to improvement in the job market; industrial production was strong in May, but may drop in June due to a drop in production worker hours; housing has be choppy with starts falling sharply in May and new home sales may show continued sluggishness.

Globally, disappointing European and UK economic data with industrial production declining in Germany, France, Italy, and the UK, the focus will be on U.S. earnings data next week. In addition, the central banks of Japan and Canada will announce their monetary policy. The economic data will be released: Industrial production (Eurozone, China); GDP (China); Retail Sales (China).

With a lot of economic news next week, and the growing concerns over the economies in the Eurozone, we expect the markets will continue to be choppy with volatility increasing.

Year-to-date the markets are up: Dow 2.2%; S&P500 6.4%; Nasdaq 5.7%.

The Markets for the past week were: DJIA down -0.7%; S&P500 down -0.9%; Nasdaq COMP down -1.6%.

Commodities (ETFs) for the past week were: Gold (GLD) up 1.27%; Silver (SLV) up 1.38%; Oil (OIH) down -2.88%; Dollar (UUP) down -0.05%; 30-yr Bonds (TYX) dropped 13 basis points to 3.34%.

The VIX this past week (a measure of market sentiment and volatility) rose to 12.08% due to Eurozone concerns.

To see what's on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is full: on Monday – nothing; on Tuesday – Retail Sales, Empire State Mfg Survey, Import and Export Prices, Business Inventories; on Wednesday –Weekly EIA Petroleum Status Report, PPI-FD, Treasury International Capital, Industrial Production, Housing Market Index, Beige Book, Janet Yellen speaks; on Thursday –Weekly Jobless Claims, Housing Starts, Philadelphia Fed Survey; and Friday – Consumer Sentiment.

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 1906 and 2030 (2 standard deviations).

For more information about options, see the 'Suggested by the author' links below.