Recap: Week Ending June 20, 2014

June 20, 2014

For the second time in June, US stocks hit new all time highs. The highs in both the Dow Jones Industrial Average and the S&P 500 come amidst the ongoing unrest in Iraq. This past week US President Obama announced that he would send 300 military advisers to the areas of unrest to monitor the situation. These military advisers appear to be the first step in a process that could involve full US military support. However, one must note that this past August the US did not interfere when it was officially determined that chemical weapons were used in Syria, and they did not interfere when Russia successfully invaded Crimea. With these past events taken into consideration, it appears that only a major event in Iraq would send US troops to the ground. The main reason for a US presence in the desert region is the vast oil reserves. An insurgent takeover of an oil refinery would send shock waves through the global supply of oil sending prices higher. Crude oil has risen on the news of possible shutdowns to refineries in the area. The insurgence strike couldn’t come at a worse time for oil prices as US refineries are currently in reduced production due to summer maintenance. To keep up with demand, refineries in stable regions of the Middle East have increased their production to near capacity.

It appears that the lack of US interference in Iraq was seen as a good thing to investors with the Dow Jones closing higher every day last week. Actions taken by US forces on Iraqi militants may cause disruption to the already sensitive US economic recovery. The combination of both higher oil prices and a lack of presence in Iraq has set the TSX on higher making new multi year highs once again this week. For the month of June, the Canadian benchmark is up over 3.5%. The move higher in oil prices is beneficial to the TSX where many of its constitutions benefit from higher oil prices allowing them to sell their refined products at higher prices. Higher prices can in turn lead to greater profits for the company.

The other big news on the week was out of the US Federal Reserve from their regular FOMC meeting as well as Chairwomen press conference. The Fed decided to reduce their current bond buying program known as Quantitative Easing by $10 billion. Currently, the US central bank is buying $35 billion worth of treasury and debt instruments in an attempt to push money into the banking system, producing lower interest rates. Lower rates lead to more spending that in turn will assist in the economic recovery. Current, rates for loans denominated in US funds have been targeted by the Federal Reserve between 0- 0.25%. Following the stoppage of Quantitative Easing, interest rates will eventually rise. Currently, 12 of the 16 board members would like a rate hike next year, and 3 would like to see a hike in 2016.This news of lower rates for the time being set markets higher. The continuation of lower rates is believed to prop up equities with low borrowing rates allowing investors to purchase larger quantities. Once rates do rise equities may be in for a shock when the flow of ‘cheap’ money disappears, and the amount of demand for equities slowly dries up. With this being said, the Fed did lower their GDP expectations for the 2014 calendar year from 2.3 to 2.1. On a brighter note, no changes in forecasts were announced for 2015 and 2016.

Next week is loaded with US economic releases. Monday the Chicago Fed National Activity Index for May is released with a previous reading of -0.32. Monday will also see the release of Existing Home Sales (MoM) for the month of May; the previous reading was 4.65M, and the consensus is for an increase to 4.74M. Tuesday will see the release of New Home Sales (MoM) for the month of May. Aprils readings came in at 0.433M while the consensus for May is a decrease to 0.440M. On Tuesday US Treasury Secretary John Lew will also speak. Wednesday will see the release of US GDP Annualized (Q1). The current consensus is for a decrease of -1.6% while the prior reading came in at 2.6%. Wednesday will also have US Durable Goods Orders for May with a consensus of 0% and prior reading of 0.8%. Thursday the US will release Initial Jobless Claims for the week of June 20. The prior reading was 312K. Friday will close the week off with Canada’s first economic releases of the week with the Industrial Product Price (MoM) which has a prior reading of -0.2% and a consensus of 0.4%. The Canadian Raw Material Price Index for the month of May will also be released. The prior reading on this index is 0.1% and the consensus for the upcoming reading is 1.3%

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