RECAP: for the week ending August 26th, 2016

August 29, 2016

Stocks ended lower for the week after worries over an imminent Federal Reserve rate increase drained earlier gains. The small-cap Russell 2000 Index avoided the broader downdraft and recorded a modest advance. Volume was light through most of the week, as investors waited for Fed Chair Janet Yellen’s speech on Friday morning at the central bank’s conference: Monday was the second slowest trading day of the year. Some good economic data helped foster gains early in the week. Homebuilder shares rose on Tuesday morning, after the Commerce Department announced that new home sales had surged 12.4% in July and reached a nine-year high. Stocks fell back at midweek, with health care stocks suffering a particular blow from renewed attention to drug pricing. Controversy over steep increases in the price of the EpiPen, which is used to treat severe allergic reactions, weighed on the shares of maker Mylan as well as the health care sector as a whole. Stocks took another leg down in reaction to Fed Chair Janet Yellen’s speech on Friday, although investors seemed initially unsure exactly how to react to the signals she was sending. Stocks rose in response to Yellen’s favorable assessment of the U.S. labour market and inflation patterns, but then retreated as investors seemed to focus instead on her statement that better conditions strengthened the case for a rate increase in the coming months.

In Europe most indexes were up, with the healthcare sector showing high volatility. The biggest news was from debt laden EU member Portugal. Portuguese government bond prices reached their lowest level in a month on Monday, following negative comments from ratings agency DBRS’s Fergus McCormick on the viability of maintaining its investment-grade rating on the country’s sovereign debt. DBRS is the only ratings firm recognized by the European Central Bank (ECB) that still rates Portugal’s debt as investment grade—S&P, Moody’s, and Fitch have junk ratings on the country’s debt. To generally qualify for the ECB’s bond-buying program and cheap loans, Portugal must maintain at least one investment-grade rating from a rating agency. Along with the weak Italian banking sector and Brexit, Portugal’s slow growth poses another looming threat to the stability of Europe’s financial system. Bond troubles also plagued England: Yields on 10-year UK government notes were largely unchanged for the week after the BoE carried out the latest stage of its quantitative easing measures, buying £1.17 billion of gilts with maturities of 15 years or longer followed by a further £1.17 billion of gilts maturing in seven to 15 years. The BoE paid higher prices than many expected in its effort to purchase government bonds from investors under its quantitative easing program, which was designed to soften the Brexit hit to Britain’s economy. The bank reported that it received fewer offers of long-dated bonds from investors than at a similar auction last week.

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