Recap: Week Ending August 1, 2014
Markets closed deep into the red for the first time in months as the likelihood of a default in Argentina became a reality. The sell off in equities Thursday was the largest seen since February with the Dow falling 300 points, erasing all gains made for the month of July. Investors in Europe were also feeling the pressure where strong selling was also seen. The Toronto Stock Exchange, TSX, faired much better compared to other global indexes only falling Thursday and Friday in what appeared to be not as strong selling pressure. The TSX was able to close the month of July in the green. The economic calendar was packed with news out of the most recent Federal Reserve Open Markets Committee meeting, FOMC. To add more to what already was a busy week, the US applied more sanctions on Russia in their attempt to stop the Russian-backed invasion of Ukraine.
The Dow Jones Industrial Average started the week off on a positive note as US Pending Home Sales month of month for the month of June missed expectations. The figure came in at 1.1% vs. 0.5% that was expected by economists and the prior reading of 6%. Markets rallied on bad news as interest rates may stay low for a while longer. Positive economic news indicates a strong, healthy economy which would lead to a quicker rate hike. Lower rates are currently helping boost stock prices as investors can borrow money at a much cheaper price to invest in the market. The lower rates have in turn led to more demand for stocks, leading to higher prices. The other important figure out Monday was the Markit PMI for the month of July that came in at the at 61, 61 was also the previous reading for June.
Tuesday saw selling pressure across the board for US equities as the US Consumer Confidence for the month of July came in at 90.3, a large improvement over the prior reading of 86.4 and the economist consensus of 85.3. With good news out of the US, the TSX closed roughly flat on the day in a very low range market.
The FOMC meeting sparked some market activity Wednesday as it was stated that the US short-term Federal Reserve Interest Rate would remain targeted between 0 and 25 basis points. As expected the Fed Pace of MBS Purchase Program was reduced by $5B to $10B, and the Fed Pace of Treasury Purchase Program was cut from $20B to 15B. In the fall, the bond buying program known as Quantitative Easing will come to an end, and an interest rate rise will soon be inedible. Following the release of the FOMC statement, Rob Carnell, Chief International Economist at ING stated, “Markets may give the FOMC the benefit of the doubt at this meeting, but come September, either the Fed will have to change its tune, and acknowledge the improvements in both labour demand and inflation or the market will vote with its feet.” With Carnell’s thoughts in mind, it appears that the next big catalyst for investors is the FOMC meeting in September.
Thursday the markets were rocked by news out of Argentina that they will default on debt which they issued to investors. The is the second time Argentina has defaulted on debt obligations in recent years. The news comes as hedge funds who were creditors to Argentina sued the country and successfully won over the fact that they did not feel it was appropriate to take a haircut on their principles. This is just the beginning of this situation over in Argentina, and it is expected to continued to rock the market in the upcoming weeks.
The week closed off the week with a bang as the US unemployment figures were released for the month of July. Markets rallied as the majority of released figures missed the mark. Nonfarm payrolls missed the consensus of 233K and the previous reading of 298K coming in at 209K. This caused the unemployment rate to rise from the previous reading of 6.1% to 6.2%. Economist expectations were for no change from the prior reading. Markets rallied on the news as bad news has become good news when it comes to a possible rise in interest rates that could very well be around the corner with the release positive economic data.