Recap: Week Ending October 17, 2014

October 19, 2014

Once again markets experienced a wave of volatility with a strong push to the downside seen across the board in equities. The NASDAQ 100, which is primarily a tech-based index, saw the worse losses out of North American indexes falling by 1.43% for the week. This is fourth straight week of strong selling in North American equities following major indexes in both Canada and the US posting new multi-year highs and all time highs respectively. It must be noted that this past week the TSX had fallen 10% from posting those all time highs a few months ago. 10% is considered to be a number market technicians use as a guideline for a correction. Keeping this in mind, the index did bounce off the lows of the week and was able to close breakeven for the week. The TSX must be closely watched over the course of the next week to see if the low from last week hold. Below the low it is believed that a large number of stop losses are placed, creating an area of possible strong selling. Investors and traders commonly place sell stop loss orders on positions to limit the amount of losses they can incur. When stop losses are triggered, a wave of selling is commonly seen.

This was a relatively busy week on the economy calendar for US. One of the main catalysts on the week was the US Fed Beige Book, which provides economists the current economic situation seen across the US through the eyes of the 12 district Fed offices. The Beige Book was released Tuesday. One of the main quotes from the press release includes, “Employment continued to expand at about the same pace as that reported in the previous Beige Book. Most Districts reported that some employers had difficulty finding qualified workers for certain positions. A number of Districts characterized overall wage growth as modest, but reported upward wage pressures for particular industries and occupations, such as skilled labor in construction and manufacturing.” The quote is of significant importance as Chairwomen Janet Yellen is practically concerned regarding “slack” in the labor force across the country. From the wording of the statement, it appears that conditions are improving. The markets appeared to be uncertain on how to react to the number, trading in a wide range Tuesday closing slightly in the red. The Beige Book went further on to state, “Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.” This paints a positive picture for the US economy; however, it must be highlighted that growth remains at a steady pace. Under normal conditions such a release would be bullish for equities; however, as the bond-buying program known as Quantitative Easing, QE, is coming to an end, the likelihood of a rate hike on positive economic data is increasingly likely.

The upcoming week is an important week for markets as many will gauge the strength of the selling pressure to see if last week was indeed a bottom in equity markets.

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