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Weekly market recap: Markets continue rally despite Ukraine

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For the week ending August 30, 2014, the markets are again making all-time highs on good economic news. The markets in the U.S. have not yet responded much to the violence in Ukraine, which has been escalating with the Russian invasion. Below is a recap of the markets for each day of the week.

The markets rallied on Monday despite rising tensions in Ukraine. The S&P 500 ended the day with a new record high of 1,997. The leading economic news were new home sales (revised higher for last month offsetting the lower sales of this month) and the rising supply of new homes on the market. Price for new homes were down, which is a positive for future sales.

On Tuesday the markets continued to rally on far better than expected economic news. The leading economic news was the dramatic jump in durable goods orders (up 23 percent), which was skewed by Boeing; excluding Boeing, orders were flat. Other data included an increase in consumer confidence, and Case-Shiller HPI which showed a slowing in home-price appreciation. The S&P 500 ended the day at a record 2,000.

On Wednesday, geopolitical events (Ukraine and Iraq) increased demand for Treasuries with yields falling slightly. The markets remained flat, as did oil which ended just under $94 as oil inventories fell 2.1 million barrels (per the EIA petroleum status report).

The markets fell slightly on Thursday due to rising concerns in Ukraine which was mitigated by good economic data (a strong rise in pending home sales; a drop in jobless claims; upward revision of second-quarter GDP). The situation in Ukraine has worsen as a limited Russian invasion may be taking place. This raises the concern over the prospect of further action by the U.S. and Europe. The S&P 500 ended at just under 1,997.

On Friday, with no major developments in Ukraine, the markets ended fractionally higher on mixed economic news (personal income and outlays report showed a deceleration in personal income and a decline in personal spending; the Chicago PMI showed an extreme monthly expansion both in production and new orders; and consumer sentiment is up, reflecting the drop in unemployment claims).

Geopolitical concerns impacted European markets despite better than anticipated U.S. economic data. The Eurozone and Japan had bleak economic updates. In the Eurozone, consumer sentiment and business in general are sagging despite no inflation. Germany, the key economy in Europe, is showing signs of weakening (GDP contracted; consumer confidence is down) due largely to the sanctions against Russia.

Japan is struggling to overcome the negative impact of its sales tax increase imposed in April (at 8 percent from 5 percent). The Nikkei 225 declined -1.3 percent in August, and -5.3 percent for this year. Retail sales and industrial production both disappointed for the month of July; this news will give the Bank of Japan food for discussion before its policy announcement next Thursday.

The U.S. markets will be watching the situation in Ukraine for renewed sanctions. EU leaders are meeting in Belgium to discuss additional sanctions as Ukrainian forces face strong resistance from pro-Russian rebels. The Ukraine military has been forced to retreat from several cities as "thousands of foreign troops and hundreds of foreign tanks are now on the territory of Ukraine", says Ukraine President Petro Poroshenko.

The fighting in Ukraine is taking on a more global aspect as European volunteers are rushing into Ukraine to fight on both sides, along with mercenaries from private military companies. These volunteers come from France, Spain, Poland, Israel, Serbia, Russia, and the United Kingdom.

Germany warns of direct confrontation between Ukraine and Russia as the crisis is "slipping out of control". Foreign Minister Frank-Walter Steinmeier said in Milan "Our hopes that direct talks between [Ukraine and Russia] would contribute to de-escalating the situation have been disappointed". "The border infringements have intensified, and raised concerns that the situation is slipping out of control". "This needs to stop, especially if we want to avoid direct military confrontation between Ukrainian and Russian military forces." These sentiments were echoed by France, Sweden, and the Netherlands.

NATO is creating an expeditionary force of 10,000 troops for rapid deployment to Ukraine to counter Russian forces. A public announcement is expected by British Prime Minister David Cameron at the NATO summit in Wales on September 4. This is in response to Russia's deployment of over 1,000 troops into Ukraine.

The bottom line: the U.S. economy continues to slowly improve. Manufacturing is moderately healthy, housing is improving as prices drop, and the services sector is strengthening; however, the labor market is still soft. Geopolitical issues are again getting news attention and could derail the advancement of the markets.

The focus next week in the U.S will be Friday's employment situation report (Jobs Report; Unemployment Rate). Fed Chair Janet Yellen recently stated that the labor market is not where it needs to be; the Jobs Report will determine if this is still the case. For the next round of Fed forecasts scheduled for September 17, the employment report (Unemployment Rate) will play a key role.

Globally the focus will be on five major central banks and their announcements: the Reserve Bank of Australia; the Banks of Canada, England, and Japan; and the European Central Bank (ECB). Attention will likely be focused primarily on the ECB given Mario Draghi's comments at Jackson Hole.

Year-to-date the markets are up: Dow 3.1%; S&P500 8.4%; Nasdaq 9.7%.

The Markets for the past week were: DJIA up 0.6%; S&P500 up 0.8%; Nasdaq COMP up 0.9%.

Commodities (ETFs) for the past week were: Gold (GLD) up 0.54%; Silver (SLV) up 0.11%; Oil (OIH) up 2.19%; Dollar (UUP) up 0.36%; 30-yr Bonds (TYX) dropped 8 basis points to 3.08%.

The VIX this past week (a measure of market sentiment and volatility) rose to 11.98% as geopolitical issues increase. The markets are vulnerable to news risk, with implied volatility still so low.

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 – markets closed for Labor Day; on Tuesday – PMI Mfg Index, ISM Mfg Index, Construction Spending; on Wednesday – Motor Vehicle Sales, ADP Employment Report, Factory Orders, Beige Book; on Thursday – Weekly EIA Petroleum Status Report, Weekly Jobless Claims, International Trade, Productivity and Costs, ISM Non-Mfg Index; and Friday – Employment Situation.

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 1938 and 2071 (2 standard deviations).

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

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