Markets may remain volatile

BY  | FROM  | 2015-06-15 13:44

The market solved a perception problem this week.  For the last few weeks, volatility felt much stronger than it actually was, but this week the numbers caught up with the feeling, as volatility increased via swings and market shifts.  Greece dominated the European markets, and did have an effect on the U.S., as the week closed with the IMF not talking to Greece directly, but with most still expecting a last-minute, drama-filled agreement.  The market’s volatility was also due to the softness of the market, as few felt the market was at a secure level (yet). 

The split between the bulls and bears was on the side of bulls, as funds stayed in the market, and consumers spent more money in May, with the forward sentiment numbers predicting a continuation of growth.  In economic data, the Chinese economy grew 7.0% year-over-year (its worst in six years), as Japanese Q1 GDP growth was revised up to 3.9%, from the initial 2.4% estimate, with the EU Q1 GDP increasing 0.4% Q4 2014.  German labor costs increased to a 3.2% year-over-year level, even as inflation remained low.  In the U.S., the JOLTS Job Opening Report for April came in with record openings (5.4 million). 

Retail sales for May missed estimates, but were interpreted as being strong (1.2% actual, 1.3% expected), and when combined with the strong June Consumer Sentiment report (94.6, when a much lower 91.2 was expected), gave hope that sales could continue to increase. The May PPI came in stronger than expected (0.5% versus 0.4%), as energy pushed the rate up. In other news, the Turkish lira declined to a record low against the U.S. dollar, as elections ousted the current government, and the yen got some support via statements from the Bank of Japan Governor. 

A BP report said that the U.S. had over taken Russia as the largest country producer of oil and gas.  HSBC will let 25,000 employees go, with another 25,000 being disassociated from the company, as it sold certain business operations (the company is also considering moving out of London). It was a mild week for M&A, as the General Electric’s ([GE]; up 0.37% for the week) sale of its lending unit was announced (Canada Pension Plan Investment Board for USD 12 billion).  Tokio Marine (TKOMY) said it would buy HCC Insurance ([HCC]; up 34.7% for the week) for USD 7.5 billion. On an issue level, Deutsche Bank’s (DBK) co-CEOs resigned; as the former finance head Cryan from UBS will replace them. 

Casino and resort owner Wynn Resorts (WYNN) fell 5.8% for the week, as an analyst’s note said gaming revenue would decline.  iPhone maker Apple (AAPL) announced its new streamlining music business, which was flat with investors, and the stock was down 1.1% for the week.  The holders of online entertainment issue NetFlix (NFLX) approved an increase in its authorized shares, with a stock split expected, as the issue gained 4.4% for the week.  Ethical drug maker Ely Lilly (LLY) gained 7.8% for the week, as investors are taking position ahead of its upcoming Alzheimer treatment report.  And in the Opps department, retailer Target (TGT) accidentally web-posted documents saying it would increase its dividend and buybacks, which it did—after the posting; the issue closed up 0.3% for the week. For the week, the market posted a thin 0.06% gain, after two weeks of declines (off 0.69% the previous week and off 0.88% the week before that) closing at 2,094.11.  The year-to-date gain was a disappointing 1.71% (but it was up), as the market remained 1.72% off its closing high (April 21, 2015).  Actual volatility increased closer to what it was feeling like, as three of the five days posted changes of at least 0.6% (large by recent history) with Wednesday’s 1.20% gain pushing emotions and expectations higher.  The market tone changed several times, but appeared to end the week slightly higher, with most still expecting a Greek debt solution in time to prevent a default (or any exit from the EU). 

European events (economic and market) weighed more into the market this week—on the downside, but U.S. economic reports mostly supported the market.  Next week may focus on the Fed meeting—for both the U.S. and foreign markets.  Breadth turned positive for the week, as economic data helped, with 260 issues up for the week, after two down weeks that saw 186 issues up last week and 117 up the week before that.  Two hundred and forty issues declined for the week, down from the previous week’s 313 and 386 the week before that.  No issue gained 10% or more (one did one the week before), while four issues were up at least 5% (eight the previous week).  No issue fell at least 10% (two did the prior week), with 14 falling at least 5% (20 did the week before).  Seven sectors were positive for the week, compared to only three that did so the previous week, and none the week before that.  Financials did the best, up 1.00%, as banks continue to be favored in the expected higher interest environment. 

Countering that were utilities, which declined 0.50%, and were off 10.73% year-to-date, as higher rates were seen not to benefit them.  Information technology did the worst, off 0.73%, as Wednesday’s 1.59% gain was not enough to make up for the other four down days. Energy fell 0.93% for the week, as oil remained volatile, but went back to its trading range.  Healthcare continued onward and up, gaining 0.81% for the week, and posting an 8.37% year-to-date gain. 

There was some concern over the upcoming U.S. Supreme Court ruling on the health care law, but investors still bid the health care sector higher. Trading volume was unchanged for the week, remaining 8% lower than the one-year weekly average. Measurable volatility increased, as the high-over-the-low price variance came in at 2.07%, up from the prior week’s 1.74%, the previous week’s 1.29%, and the anemic 0.69% from the week before that. 

The spread is now closer to its one-year 2.25% average.  The VIX closed down at 13.78, from the week before's 14.21, as market optimism picked up; it had traded as high as 15.74.  Interest rates were volatile, with the U.S. 10-year Treasury yield reaching 2.49% mid-week, as it closed the week at 2.40%, down a tick from the previous week’s 2.41%, but up from the prior week’s 2.13% (year-end 2014 was 2.17%).  Oil was also volatile, as the U.S. was declared the top oil producer (by a BP report), closing at USD 59.94, up from the week before’s 58.95, but down from the prior week’s 61.58. 

Oil appeared to have settled back into its range, at USD 58-62.  The euro closed at 1.1268, up from the previous week’s 1.1116, which was up from 1.0993 the week before; the pound was at 1.5562, up from the previous week’s 1.5269, and 1.5290 the week before; the yen (quoted in yens-to-U.S. dollar, so higher is weaker) was at 123.40 compared to the previous week’s 125.62 (and 124.14 the week before). Next week will bring a continuation of the Greek situation.  S&P added integrated circuit maker Qorvo (QRVO) to the S&P 500, as it deleted tobacco issue Lorillard (LO), which was acquired by Reynolds American (RAI). Next week’s tone will be set by the two-day Fed meeting, which will end with Wednesday’s press conference and expectation report.  Earnings may remain light, with analyst’s projections and company guidance getting more attention (and having more market impact).  Wednesday’s FedEx (FDX) earnings release will be watched for its insight into consumer spending, as Thursday’s Cisco Systems (CSCO) release will be watched by for its business-to-business sales.  Friday is the quarterly quadruple witching day (the expiration date of stock index futures, stock index options, stock options, and stock futures), with S&P Dow Jones Indices adding in its quarterly share reweighting, which could cause some volatility.

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