Equities started off on a negative note Monday following a slide in China’s stock market that carried over into the rest of Asia and Europe. The Chinese government decided to end its policy of buying stocks and instead focused on punishing what it terms “malicious short-sellers”. This decision was highlighted by the arrests of a financial journalist, regulator and the detention of a hedge fund manager for questioning. Obviously, for investors in Chinese focused investments, this tactic is the continuation of an ominous trend.
Energy prices are in the midst of a major rally, with the largest spike in oil prices since Iraq invaded Kuwait and the U.S. response of Operation Desert Storm. Prices climbed above $48 per barrel on Monday, a 26 percent advance on the lows of only six trading days ago. This is an impressive rebound, but it only takes oil prices back to their end of July levels. The surge is being fueled by short covering, with speculators closing their short positions as prices rise. A pullback this week is likely, but a retest of the lows, if one is coming, might be several weeks away thanks to the large amount of ground gained.
There will be some interesting economic figures announced this week. On Tuesday, motor vehicle sales for August will be released, along with the PMI. Construction spending for July will be released as well. Productivity and unit labor costs for the second quarter will be reported on Wednesday, in addition to factory orders for July. All of these data points will either directly impact GDP estimates and/or the Federal Reserve’s interest rate policy. Finally, the unemployment rate for August is due out on Friday.
For the S&P 500 Index, the key level to watch this week and into September are the 2000 and 2050 marks. The former level served as support from December to February. The latter level was the support line from February to August. There’s likely to be resistance at both levels as stocks rebound. After Monday’s dip, the S&P 500 needs to gain 1.4 percent to reach the 2000 level. The 2050 level is about 4 percent away and unlikely to be hit over the coming days without an upside surprise.
Fed policy will increasingly come to dominate the conversation in financial media. The Jackson Hole meeting over the weekend saw global central bankers tell Fed officials they were prepared for a hike. There’s little economic argument for delaying rate hikes, particularly because the short-term interest rates are already rising. Three-month treasury yields were 0.08 percent on Monday, but they were recently as high as 0.12 percent and up from 0.01 percent in July.