Recap: Week Ending June 13, 2014

June 13, 2014

For the first time in many weeks stocks in the US closed lower. The selling pressure comes as both the Dow Jones Industrial Average and the S&P 500 make new all time highs. It appears that US stocks are relatively weak at these upper levels. Some of the downside pressure can be attributed to a lack of correlation between markets. On an intraday basis, there were times this past week when all three major US indices were divergent, with such activity playing out it is tough for the market to continue in its forward path. Trading ranges in the recent week were also on a decline with little activity in either direction. The lack of conviction in either direction makes many wonder if the top is near on equity markets. This past week was also rollover in US equity futures products where traders must roll to the next months contract inorder to avoid delivery of the front month contract. Rollover is occurring at a vital time as equities are currently on all time highs and traders must decide to rollover and buy or take profits and bet on downside activity. It must also be noted that the Toronto Stock Exchange Composite Index, TSX, closed at levels above the 2008 high. This marks the first time the index has reached these levels since the recession. It took the TSX a great deal of time to reach these levels compared to its US counterparts which made new highs almost a year ago.

The biggest news on the week was out of Iraq where it appear a militant group is growing violent and taking aim at nearby towns and territories. The uncertainty in Iraq comes a few years after the US withdrew troops from the country in 2011. It seems that Iraq may be headed towards further years of unrest, however, the US President Obama has stated that at this time he is not planning on US military intervention in the country. With this being said, President Obama was quoted saying that further development may pose a threat to US interests, and the situation must be watched closely. With the most recent case of uncertainty in the Middle East the price of crude oil spiked higher to make a new high for the 2014 calendar year. Oil rallied on the news as a disruption at a refinery could send production lower leading to a shortage that in turn would send the price higher for what is known as black gold. The spike in the price of oil has benefited the TSX, which the vast majority of its constitutions are energy based and benefit from higher crude prices. The news out of Iraq did send shockwaves through equity markets leading a sell off. Markets closed higher Friday following the announcement from Obama stating that he is currently not interested in intervention. The rally is likely to have occurred as many believe that at US cannot afford to go to war with the current economic recovery underway and any deviation from the recovery may dampen economic strength. To the surprise of many US bonds did not see a strong presence of buyers following the news out of Iraq. Bonds usually are seen catching a bid on the news of uncertainty as they are a haven in times of conflict. With this being said, gold did see buyers enter the market as the threat of further conflict amounts. Both bonds and gold appear to be waiting till next week’s US Federal Reserve interest rate decision and pace of treasury purchases announcement will come Wednesday. There is no doubt that this announcement is going to be similar to the prior ones, however, will continue to provide reassurance to the market.

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