Market Perspective for December 14, 2015

The Federal Reserve’s Wednesday afternoon policy announcement will be the focal point of this week’s market activity. The market has already priced in a 0.25 basis point hike in anticipation of the meeting. According to The Wall Street Journal, Fed officials are worried interest rates may need to be cut down the road, but those concerns should not delay Wednesday’s decision.

Many assets are positioned to rally coming into the week. Investors hedged portfolios ahead of Wednesday’s interest rate announcement, selling bonds, commodities and equities. Oil prices reached 7-year lows and the S&P 500 lost more than 3 percent during a choppy week of trading, hitting high-yield bonds especially hard.  The two largest junk bond ETFs, SPDR Barclays High Yield Bond (JNK) and iShares iBoxx High Yield Corporate Bond (HYG), saw huge volume and heavy selling. Both funds also traded at a discount to their NAV. This tends to signify capitulation selling: selling high volume at a discount. Chinese A-share ETFs capitulated during the summer’s market crash, marking a bottom for those funds.

Other economic data on tap this week includes CPI figures for the United States and the United Kingdom as well as euro zone manufacturing, service sector and inflation reports. A Bank of Japan (BOJ) press conference is scheduled for the end of the week in the wake of the Fed meeting. Investors will be looking for BOJ reaction and what it may mean for quantitative easing in Japan. US housing starts and permits for November will be released on Wednesday.

FedEx (FDX), Oracle (ORCL), Rite Aid (RAD) and BlackBerry (BBRY) will release earning reports this week. The consensus estimate for FedEx is $2.53 earnings per share and $12.46 billion in revenue. FedEx gauges the overall health of the economy and provides the first major data point for the holiday shopping season. The company’s guidance may impact online retailers such as Amazon (AMZN) who rely on shipping services to move goods. Tech stalwart Oracle is expected to earn $0.60 per share on revenues of $9.06 billion. Investors will be looking for news on the company’s cloud services.

Commodity related currencies are rallying on the rebound in oil. The Chinese government announced, indirectly, that it will allow the yuan to depreciate versus the U.S. dollar on Friday. The yuan will now be valued against a basket of currencies and the U.S. dollar makes up a little over one-quarter of the index. Emerging market currencies could struggle if the yuan depreciates.

Finally, Disney (DIS) may see some buying this week ahead of the opening of the latest Star Wars movie. The movie is projected to break nearly every movie opening record. Media and consumer funds such as Fidelity Select Multimedia (FBMPX) and iShares US Consumer Services (IYC) could be affected. FBMPX had 24.4 percent of assets in DIS at the end of October; IYC had 5.5 percent as of Friday’s close. Next week’s initial reviews will indicate the potential for the film’s long-term success.

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