Recap: Week Ending January 24, 2014
Global equity markets closed lower, showing strong conviction to the downside providing a much needed spike in volatility. The biggest loser on the week was the S&P 500, which closed down -2.007% followed by the Dow Jones Industrials, which closed down -2.001% on the week. Tech faired a bit better closing down -1.544% on the week. The Toronto Stock Exchange index, the TSX, felt the same weakness as the Nasdaq closing down -1.544%. The drop this week is the largest weekly decline since 2011 for the Dow Jones. The loss in the S&P this week is the largest since June 2012. Despite the large sell off, the S&P index is only 3.1% from its all-time high which it made on January 15th. Both Thursday and Friday saw equities falling hard, posting triple digit losses both days. It must be noted that despite the week being shortened due to Martin Luther King Jr day, extreme action occurred in the market. Volume in both the equity index futures and interest rate futures has exploded. The market for US treasuries has taken off as a risk off play comes into effect. Since the low made mid week, the US 30 year bond has rallied nearly 1.3% to close the week out at 131.78. It appears that the 30 year is targeting the 132.55 area which historically was the area of large sideways trade. Following that, the 30 year may look to approach the trend high made in late October just under 134.5. The CBOE VIX, which is known as the volatility index, spiked 32% this week which marks the largest increase since April 15th when the Boston Marathon Bombing occurred.
Despite little action in the start of the week, the TSX sold off hard Friday, erasing a bulk of the gains made for the month of January. Recently the TSX has been propped up by a weakening Canadian Dollar which has fallen to levels not seen in years. With the dollar below parity, US investors are more attracted to Canadian assets as their spending power dramatically increases. It must be noted that the somewhat positive correlation between the CAD and the TSX has broken down and now is sitting at -0.86. The correlation between these two assets has been hovering around this area for some time, however, appears to have recently bottomed. The TSX has also been supported by a strong bid in gold as global risk increase. The increase in the price of gold is supportive for many companies, which list on the TSX which mine gold and other precious metals. As the global uncertainty looks to continue, the price of gold is only expected to increase.
The sudden downturn in the market appears to be long overdue as equities have seem to have been untouchable for the past year. The fears of possible slowdowns in China have become a large reality. For the past quarter China reported a slowing GDP of 7.7% from the previous reading of 7.8%. Even though the decline is not overly large, it still indicates that demand for Chinese goods could be weakening, showing an overall lack of global demand. This upcoming week will also mark the last FOMC meeting where Ben Bernanke will be head of the US Federal Reserve. In his last meeting, Chairman Bernanke decided to slow the current bond buying program known as Quantitative Easing down from $85b a month to $75b. The market appears to be uncertain on the out coming of the upcoming meeting, however, with the current negative economic news circuiting, the outcome of the meet may possibly a reduction in the taper or no change.