Archive for month: June, 2014

Headlines can be very powerful drivers of markets, and when the headlines involve the Middle East, war and oil supplies, you can bet the whole world gets a justified case of the jitters.

So, it should come as no surprise that the action in the commodities pits last week was a broad rally, as both gold and particularly oil prices moved sharply higher on news of the violence in Iraq. The commodity ETF DBC rallied 1.3% last week.

Given that Iraq was the main driver of commodity markets last week, it’s not surprising that oil was the best performer, as WTI and Brent crude both rallied over 4% on the news that terrorist group ISIL has seized most of the northern portion of the country (which has a lot of untapped oil reserves), and more importantly were moving south towards Baghdad (and towards the oil producing region in southern Iraq).

Oil prices were essentially flat in Monday trade, as over the weekend ISIL began to encounter resistance from Iraqi forces. Moreover, the international community now is working toward halting the group’s advance. Still, the recent action in oil via the United States Oil (USO) fund has showed a clear move higher. In fact, USO is up more than 4% since news of the ISIL violence flared up and grabbed global attention.

Yet it behooves us to see through the headlines here and keep this in mind: If ISIL gets south of Baghdad, this situation becomes materially worse and oil will rally. For now, however, the current state of affairs is largely priced into crude, which is at the highs for the year. Still, if you are looking to trade this situation (a risky but potentially profitable move), then I’d look to buy any dips in USO, or in related crude oil futures contracts.

Last Week

Last week ended up being a potentially very important week, but not because of the actual data, which slightly disappointed in the U.S. and came in generally in-line in China (further implying the pace of growth is stabilizing).

The most important event of the week came Friday morning, when Bank of England Governor Marc Carney surprised markets by hinting the BOE could raise rates this year, which is sooner than the market expectation (Q1 2015).  That surprise comment sent the pound nearly 1% higher vs. the dollar and the FTSE down more than 1%.

Carney’s comments matter especially in the context of the Fed meeting this Wednesday.  I’m going to flush this out more in the preview of the FOMC, but if there’s one thing the market seems too “complacent” on, it’s that global central banks are going to keep policy static for quarters to come.

Point being, the stock market has not priced in the Fed suddenly upping the time frame of rate increases or an acceleration of tapering.  If the broader market is as surprised as London was by Carney, and the prospects of a rate increase become more real, that will be a negative on the market.  It’s early yet and Carney just “hinted” at rate increases, but it underscores the point that markets are very complacent about the expectation for monetary policy in the UK and U.S., and that is a source of risk we need to monitor.

Turning now to the actual data, there were only two releases worth covering in the U.S.:  weekly claims and May retail sales, and both were slight misses.

Claims ticked higher to 317K, while retail sales increased in May by 0.3% vs. (E) 0.6%, while the “control” group, which is the best gauge of consumer spending, was flat in May (which reflects an uninspired consumer).  While slightly disappointing, though, the data didn’t change the outlook for the economy going forward (GDP estimates for Q2 remain around 3%).

Finally, China was in focus last week as CPI, PPI, Money Supply, Industrial Production and Retail Sales were released.  All the reports were basically in-line with expectations, which further confirms the pace of economic growth in China is stabilizing and implies the chances of a Chinese “hard landing” continue to get smaller (so, point being, China isn’t a threat to the global rally).

This Week

It gets a bit busier this week from an economics standpoint, with the highlight clearly being the FOMC meeting Wednesday.

First, it’s a meeting with staff projections and a Yellen press conference.  That’s important, because as we saw in March, there is the chance for a “hawkish” surprise in Fed officials’ expectations for the economy, and from Ms. Yellen herself (i.e., the “6 months” comment during the March press conference).  Additionally, given the Carney comments last week, markets will be nervous about anything that might be incrementally more “hawkish” than consensus expectations.

Again, the thing the market seems most-complacent with right now is the outlook for Fed policy, so that’s an area we need to continue to follow, as surprises usually come from things with the most complacency.

Away from the Fed, we get our first look at June economic data via the Empire State Manufacturing Index (this morning), and Philly Fed Index on Thursday.  While neither moves markets the way they used to (given the “flash” PMIs, which will be released a week from today), Empire State and Philly still are important in the context of a market that needs constant re-affirmation that the economic recovery is accelerating.

Also this week we get the first piece of May housing data via Housing Starts on Wednesday.  The April data implied we may finally be seeing a “bounce” in housing like we’ve seen in other sectors of the economy after the winter weakness, so data that further confirm this will be welcomed by the market.

Bottom line is this week will be Fed-dominated, especially in light of the Carney comments.  But, the rest of the week’s data also matter, because the market does need constant proof that the economic recovery in the U.S. is continuing to slowly gain momentum. Multiple pieces of evidence to the contrary will act as a headwind.