For the week ending June 7, 2014, the markets continued their advance helped by the expected rate reductions of the ECB (European Central Bank) and the Employment Situation reports. New record highs were set by the Dow and S&P.
The ECB lowered rates on Thursday, as expected, to improve the economy of the Eurozone and combat deflation. In addition, it will be increasing its purchases of packaged business loans. Included in the drop in rates is a negative rate for overnight deposits to the Central Bank by member banks; an action that has never been tried before. This means that member banks will now have to pay the ECB to hold their deposits; an action which should encourage the member banks to increase consumer and business loans. Unlike the U.S., the ECB has not yet implemented quantitative easing (the large-scale purchasing of bonds and other financial assets).
The Jobs Report and Unemployment Rate, released on Friday, indicates that the economy continues to improve which led the Dow and S&P to new record levels. All sectors, except the Healthcare sector, showed improvement led by the cyclical sectors. Nonfarm payrolls increased in May by 217,000 (216,000 private sector; 1,000 public sector); and the Unemployment Rate remained unchanged at 6.3 percent (6.4 percent expected).
On the earnings front, as earnings season ended, public sector companies led the way with prominent PSU stocks registering earnings growth of around 2 to 8 percent.
In The News
A class-action lawsuit has been filed against 13 exchanges over HFT (high frequency trading). The suit filed in U.S. District Court, charges that the exchanges have been selling "advance access" to market data through co-location services and private feeds. The exchanges listed in the suit include: NYSE, BATS, Nasdaq OMX, and CBOE.
Bank of America (BofA) could face over $12 billion to settle probes by the U.S. Justice Department and a number of states. The probes allege that the bank handled shoddy mortgages. BofA is the second largest U.S. bank facing multiple government probes related to " underwriting, sale and securitization of residential mortgage bonds before the financial crisis."
A lot of economic data was released this week, including May readings of manufacturing and service PMIs. In addition, five central banks met with only the ECB lowering rates.
The focus next week in the U.S. will be on the consumer with Retail Sales and Consumer Sentiment. On the producer side we have the PPI-FD (producer price index-final demand).
Globally, the focus will be on industrial output and merchandise trade data. The Bank of Japan (BoJ) meets and it is expected to leave rates unchanged. China will release consumer and producer prices for May, retail sales, industrial production, and its merchandise trade balance.
With little economic news, we expect the markets to be choppy next week in a tight range. The data from China will come out on Monday and Friday and could add to the volatility. Expect small dips to be followed by buying; if the markets overextend to the upside, expect profit taking. Pundits are expecting the S&P to hit 2,000 by the end of this month.
Year-to-date the markets are up: Dow 2.1%; S&P500 5.5%; Nasdaq 3.5%.
The Markets for the past week were: DJIA up 1.2%; S&P500 up 1.3%; Nasdaq COMP up 1.9%.
Commodities (ETFs) for the past week were: Gold (GLD) up 0.15%; Silver (SLV) up 1.11%; Oil (OIH) up 2.54%; Dollar (UUP) unchanged; 30-yr Bonds (TYX) rose 11 basis points to 3.44%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 10.73% due to the ECB and Employment Situation reports.
To see the week in review, go to the Econoday calendar.
On Monday, with a strong revised ISM report, the Dow rose 0.2% to 16,743.
On Tuesday, despite a strong vehicle sales report, the Dow dropped fractionally to 16,722. Gold held at $1,245.
On Wednesday, with mixed economic news, the Dow rose fractionally to 16,737.
On Thursday, with a very positive Weekly Jobless Claims report and interest rate drop by the ECB, the Dow rose 0.6% to 16,836 (a new record).
On Friday, with the Jobs Report as expected and the Unemployment Rate remaining unchanged at 6.3%, the Dow rose 0.5% to 16,924 (another record high).
Next Week's Calendar
To see what's on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is light: on Monday – nothing; on Tuesday – JOLTS; on Wednesday –Weekly EIA Petroleum Status Report, Treasury Budget; on Thursday –Weekly Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories; and Friday – PPI-FD, Consumer Sentiment.
If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised.
For more information about options, see the 'Suggested by the author' links below.