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Weekly market recap: Markets experience wide swings

Markets experience wide swings
Markets experience wide swings

For the week ending August 9, 2014, the markets ended up after recent declines over geopolitical events. While the economy has improved in the second quarter, events in Portugal, Ukraine, and Italy have caused wide swings in the markets this past week.

The markets rose on Monday with good news regarding Portugal's bailout of Banco Espirito Santo SA. A hybrid bailout which embodies a tougher European stance, it has both private creditors and taxpayers sharing the burden. This unique arrangement does comply with current EU rules; however, new regulations for 2016 would place a greater burden on senior creditors and large depositors.

The markets dropped on Tuesday as concerns escalated over Russia's military action in eastern Ukraine. Poland's foreign affairs minister publicly stated that a Russian invasion of Ukraine was imminent. At Russia's request, an emergency United Nations Security Council meeting was held. At the meeting Moscow's envoy called the situation in Ukraine a "humanitarian catastrophe", indicating that Russia may send in troops. This rattled the markets that considers this a pretext for a military invasion of Ukraine.

On Wednesday, the good news on the U.S. trade deficit was offset by a report from NATO that Russia has amassed approximately 20,000 troops on the border of eastern Ukraine. In addition, Russian President Putin ordered food import restrictions on Europe and the U.S. as a retaliatory response to economic sanctions. Russia and the Western world are now embroiled in the worst standoff since the Cold War, as Putin refuses to end support of rebels fighting in eastern Ukraine.

The markets dropped on Thursday over the ban on Western food imports and Italy's slide back into recession. This unexpected setback is the third time in five years, and it threatens the eurozone's economic recovery. It is a major blow for Prime Minister Matteo Renzi's administration, which said Italy will lead by example on growth.

By Friday, the markets rose sharply on reports that Russia is seeking to de-escalate the conflict in Ukraine and is moving troops back from the Ukraine border. This news offset concerns over renewed fighting in Gaza and the bombing of ISIS militants in Iraq. This huge reversal indicates how the situation in Ukraine has captured the attention of the markets.

Recent news indicates the fighting has intensified in Ukraine, increasing fears of a Russian invasion. NATO chief Anders Fogh Rasmussen has renewed his warning to Moscow to pull its troops from Ukraine's border as Kiev reported it continues to come under fire from positions within Russia.

The bottom line: despite a growing economy (both manufacturing and non-manufacturing have improved), geopolitical tensions (especially the Ukraine) have dominated the attention of the markets. The good economic news in the U.S. contrasts with the weakening economic situation in Europe; especially the PIIGS nations: Portugal and Italy.

The focus next week in the U.S., with a moderate economic schedule, will be the Fed's industrial production report, retail sales, weekly initial jobless claims, consumer sentiment report, and the producer price index (PPI).

Globally the focus will be on the following: Bank of England quarterly inflation report; eurozone industrial production and GDP; Germany GDP; France GDP; and China industrial production and retail sales.

Year-to-date the markets are mixed: Dow -0.1%; S&P500 4.5%; Nasdaq 4.7%.

The Markets for the past week were: DJIA up 0.4%; S&P500 up 0.3%; Nasdaq COMP up 0.4%.

Commodities (ETFs) for the past week were: Gold (GLD) up 1.46%; Silver (SLV) down -1.69%; Oil (OIH) up 0.09%; Dollar (UUP) down -0.05%; 30-yr Bonds (TYX) dropped 6 basis points to 3.23%.

The VIX this past week (a measure of market sentiment and volatility) dropped to 15.77% as concerns of a Russian invasion of Ukraine declined. However, as the fighting in Ukraine continues and the rebels retreat, it is likely that Russia will send troops across the border and the markets will react violently.

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

The economic calendar for next week is moderate: on Monday – nothing; on Tuesday – Treasury Budget; on Wednesday – Weekly EIA Petroleum Status Report, Retail Sales, Business Inventories; on Thursday – Weekly Jobless Claims; and Friday – PPI-FD, Empire State Mfg Survey, Treasury International Capital, Industrial Production, Consumer Sentiment.

If you're trading options, we suggest Put Credit spreads for next week at 2 standard deviations or greater. Expect the price of the SPX to fall within 1853 and 2013 (2 standard deviations).

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

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