Recap: Week Ending August 2, 2013

August 2, 2013

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After a week of strong horizontal consolidation in both the Dow Jones Industrial Average and the S&P500, equities were able to close the week on all time highs. Also, the NASDAQ hit a new 13 year high, adding more strength to the rally. On the other hand, the Toronto Stock Exchange traded downwards, however, the drop was nothing major. The slight pullback in the index signals the possible correction even though the drop was no more than 2.3% to the downside. The idea of a floor on the TSX here comes into play as it bounced off levels which are slightly above its 200 and 50 daily averages, a key zone for support. In Europe the London Financial Times Index, FTSE, rose to its highest level seen in the month of July. The pop in the FTSE comes as the German DAX Index pushed higher on the week.

The markets were exposed this week on a flurry of economic data out of both Europe and the United States. On Tuesday consumer confidence in the US fell to 80.3 from a prior reading of 82.1. Limited reaction was seen on the number. On Wednesday,  the Canadian Government released its GDP for the month of May producing a gain of 0.2%. The real catalyst of economic data came later Wednesday when the US Federal Reserve left interest rates at 0.25%, stating that no change is imminent. On this news,  it still is not clear when a possible slowdown of Quantitative easing may occur or when rates may once again rise. In past appearances,  FED Chairman Ben Bernanke stated that change may occur sometime in the fall. This has lead many cautious investors to sit and wait till September, when they  believe a change in monetary policy may occur. In the meantime markets are expected to continue to march higher. Many fear that once QE stops and rates rise the market will take a steep decline judging by its reaction to a possible slow down.  Moving forward, later in the week both the Bank of England and the European Central Bank kept rates unchanged at 0.5%. To close the week, the US reported their monthly unemployment rate. During the month of July the US unemployment picture improved, the percentage of the population which was unemployed, fell from 7.6% to 7.4%. This number does not sit all to well with some investors when the Nonfarm Payroll only produced 162K compared to the 184K which was expected.  Instead of US markets reacting positively to the significant drop in unemployment, equities sold off because of the fear of ending QE. A good employment picture means that QE may start to taper off. As mentioned before many investors believe that QE is keeping the market afloat, and without it a strong push to the downside would be seen.  The reality that many are beginning to face is that QE will have to end and rates will rise, but the question is when.

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