Recap: Week Ending July 18, 2014

July 18, 2014

Markets closed the week higher despite serious concerns over the emergence of the rise of further geopolitical risks out of Eastern Ukraine. Markets rallied Monday on little news. It appears that the push higher may simply be a continuation from the post FOMC minutes rally which were released the prior week. Tuesday saw the release of the US New York Empire State Manufacturing Index for July. The index came in at 0.2% where economists were expecting a gain of 0.6% over the prior reading of 0.3%. The disappointing figure lead to a lack of volatility on the day with the majority of indexes closing flat. Wednesday was a busy day on the economic calendar which speeches from both heads of the Bank of Canada and the US Federal Reserve. As expected Steven Poloz kept the Canadian benchmark target interest rate at 1%. The weak unemployment data released last Friday was expected to weigh on the economic decision of the BoC. James Knightley of ING stated that, “In turn we saw unemployment take a small step up from 7.0% to 7.1%, showing that significant slack still remains in the economy while adding to worries about the prognosis for consumer demand.” Knightley went on to say, “With regard to the Bank of Canada, the evident spare capacity gives it plenty of room to keep monetary policy loose as the BoC insist that inflation is not a threat despite headline inflation reaching their.” With these thoughts taken into account, it appears that the Canadain central bank is more hesitant to raise rates vs. other countries. Wednesday also saw a press conference from US Federal Chairwomen Janet Yellen. At the press conference, Cairwomen Yellen stated that the US economy still has a long way to go and that there is a high degree of economic accommodation. Yellen also pointed out that still “Too many Americans remain unemployed,” and that the inflation rate is not close to the 2% target which was set by the US central bank. These dovish comments regarding interest rates propped up both Candian and US markets as the idea that lower rates may be around longer than originally expected.

Thursday markets entered a state of volatility as a Malaysian Airlines flight over Eastern Ukraine was shot out of the sky. Unfortunately, all passengers aboard the plane perished. The US was very reluctant in pointing the blame towards Russia in their initial reaction. The airspace where the plane was shot down is an area where recent fighting has taken place on behalf of pro-Russian separates. Taking this into consideration, the plane could be shot down by a rebel group which may be supported by the Russian government. The situation remains extremely unclear with investigators having a difficult time approaching the crash site which is said to be under the control of Russian rebels. Markets took a steep dive on the news of possible further sanctions from the US on Russian trades or even a US invasion. Friday the US announced that the plane was most likely shot down by rebels which may or may not be supported by the Russians. This sent markets higher knowing that there was some understanding of the situation and that it may not be a direct attack from the Russian government. Friday was also a busy day on the economic calendar in both Canada and the US. The Canadian Consumer Price Index (YoY) for the month of June was released. The figure came in better than expected at 2.4%. Economists were expecting no change from the prior reading of 2.3%. The higher than expected value shows that many of the Canadian indicators regarding inflation are contradicting themselves. The lack of exact values leads one to believe that the true inflation situation in Canada may be truly unknown. Friday also saw the release of the Reuters/Michigan Consumer Sentiment Index for July. Unlike the Canadian economic indicator, the Consumer Sentiment index came in lower than the consensus of 83 and the prior reading of 82.5.The actual value was 81.3. The release of the value helped send markets higher as bad news is good news as poor preforming economc indcators can lead to a prolonged time spent at lower rates.

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