Month: August 2015

Retail shares could see some activity as reporting season heats up. Wal-Mart (WMT), Home Depot (HD), Staples (SPLS) and Target (TGT) headline another significant week for the sector. Aside from retail, there are not many large companies reporting, although Hewlett-Packard (HPQ) and Deere (DE) are two names that will garner some attention.

The minutes of the previous Federal Reserve meeting will be released on Wednesday, along with inflation data. Housing data for July is also out this week. The Fed’s minutes will be closely examined because it was the last meeting before a possible September rate hike. Recent events, mainly China’s decision to devalue the yuan are also factoring into investors’ expectations of a Fed rate increase. Previously, the Federal Reserve seemed unconcerned about events overseas spilling into the U.S., but with oil prices at a new 52-week low and Asian currencies under pressure, that may change.

West Texas Intermediate Crude fell again and has now lost 30 percent over two months, closing at $41.87.  Based on the overall trend, a move into the high $30 range is a becoming a threat, though the odds favor a rally over the coming weeks.  Copper prices moved back towards their 52-week lows as well on Monday and a bottoming looks likely.

Currency markets will play a major role this week. Asian currencies continued to weaken thanks to the aftershocks from China’s devaluation. The U.S. dollar hasn’t strengthened much overall due to strength in the euro and a stable yen, though U.S. Dollar Index is only several percentage points below its old highs. Look for the currency markets and commodity markets to move in sync this week. It is unlikely commodities will drop on U.S. dollar weakness, or vice versa.

Finally, it is a distinct possibility there will be heightened market volatility over the coming weeks. Trading volume is lighter with increasing numbers of traders on vacation now through Labor Day. With lower volume and new, whether good or bad, can impact performance of the market to a far greater degree.  Moreover, if investors begin to a pushback in rate hikes, we could see a strong rally in equities, commodities, and a pullback in the U.S. dollar.

The story of the week was China’s decision to allow the yuan to depreciate versus the U.S. dollar and other currencies. The People’s Bank of China said it wants to have the onshore yuan, controlled by the PBoC, trade more closely with its offshore counterpart. In recent years, offshore yuan has traded lower than onshore yuan because the market expects devaluation, though the central bank refused to allow depreciation. Opening up the currency to greater market forces serves two purposes for China at this time. First, it must take these types of steps if it wants the IMF to add the yuan to the SDR (special drawing rights) basket, making it an official reserve currency. Second, the slowing Chinese economy could use a shot in the arm, particularly from the struggling export sector.  If the Chinese central bank allows it, the recent drop in the yuan may be a small first step in what could be a much longer devaluation process.

The impact of the falling yuan was global. Asian currencies were hardest hit as they devalued in sympathy with the yuan. On Friday, the Malaysian ringgit suffered its worst one-day decline since 1998, amid the 1997-1998 Asian Currency Crisis.  Commodities were also impacted. Gold rallied on the news, but for oil this was the push needed to send it to new lows for the year.

Economic data was mixed over the past few days. Unit labor costs increased 0.5 percent in the second quarter, exceeding expectations. Retail sales were up 0.6 percent in July and last week jobless claims fell to a 4 decade low. Industrial production was solid in July, rising 0.6 percent, while producer prices climbed 0.2 percent.  The strong retail sales number caused investors to slightly increase their expectations for a September rate hike.

Greece signed a new bailout agreement but the process may have ended the current government. Support for Prime Minister Tsipras has dwindled as many in his own party rejected the bailout agreement. If the dissenters remain opposed, they are only one vote shy of toppling the government. Tsipras is expected to call a confidence vote as soon as next week.

Equities initially struggled due to China’s moves, but all of the major indexes moved into the black on Friday. The S&P 500 Index closed the week with a gain of 0.67 percent. The Dow Jones Industrial Average followed, rising 0.60 percent. The Russell 2000 advanced 0.48 percent and the Nasdaq rallied 0.09 percent.

As for sectors, even though oil prices fell, energy shares rebounded sharply and SPDR Energy (XLE) gained 3.52 percent. Behind it was utilities and industrials. Financials was the worst performing sector thanks to China’s currency move, which triggered buying of U.S. treasuries.