Market Perspective for July 10, 2015

Despite an eventful week internationally, the markets were quite resilient.  Shares initially sold off on concerns about Greece and China but a big rebound on Friday has stocks back near where they finished last week. The Nasdaq was down about 0.4 percent due to weakness in technology, but the Dow Jones Industrial Average was up for the week. The Russell 2000 and S&P 500 are nearly back to even in early Friday trading.

Greece appears to be headed for a deal this weekend after the United States put pressure on Germany.  There are geopolitical considerations at the top of a list of concerns, with Greece signing a $2.2 billion gas pipeline deal with Russia. Overall, Greece barely impacted the markets as investors were more concerned with how the crash in Chinese stocks would affect the global economy. Copper and oil prices slipped over the week and many commodities fell in China as people scrambled to meet margin calls.

Although Greece maintained composure publicly, frenetic efforts to navigate the crisis have taken place behind the scenes. It is speculated that the prime minister of Greece hoped to lose Sunday’s referendum and was planning on responding to creditors with a deal similar to the one previously offered. The rejection of creditor terms by voters put Greece in a tougher negotiating position and probably would have resulted in no deal had the U.S. not stepped in. The proposal on the table now largely reflects the initial proposal that was rejected by voters last Sunday.  It may find little support from the prime minister’s own party and could anger Greek voters, but there are likely enough votes in parliament to approve the deal.

China’s government deflected attention from Greece as it fell into a state of panic. A seemingly unending series of bailout measures were issued yet share prices kept falling. Only when most of the market was halted and the government announced it would put short-sellers in jail did the market recover. Over the past two days, the major indexes rebounded sharply, with nearly all stocks limit up, even though only about half the market is trading. Most shares are still halted by request of the individual companies, fearful that banks would sell their shares pledged as collateral for loans.

Until the Chinese market resumes normal trading, it is hard to know if the rebound is a bottom or a bear market rally. One sign that at least a short-term bottom is in place could be seen in Deutsche X-trackers Harvest CSI 300 China A-Shares (ASHR). On Wednesday, it was selling for a 10 percent discount to NAV as investors bet the Chinese market would collapse on Thursday, a sign of extreme panic by foreign investors. Chinese shares went up on Thursday and ASHR rebounded back to its NAV for a 20 percent gain on the day.

The U.S. wasn’t without its own a headline-grabbing story this week. The NYSE market suffered a major software glitch that halted trading, though other exchanges such as Nasdaq were able to handle the trading volume. Some wonder if there wasn’t more to the problem as United Airlines and the Wall Street Journal suffered simultaneous Internet disruptions. On Friday, TD Ameritrade was experiencing trouble routing orders. The government and NYSE continue to deny that there was a cyberattack.

Greece, China and the NYSE glitch subverted positive economic news reported this week. The Atlanta Federal Reserve’s GDP Now model raised its estimate of second quarter GDP growth to 2.3 percent. On Friday, we learned wholesale inventories grew 0.8 percent in May, well above estimates of 0.3 percent growth. Inventory growth is positive for GDP and decreases are negative, so this will likely increase the GDP Now estimate when it is revised next week.

The release of the Fed’s minutes had investors varied in their interpretations. Many saw the minutes as a possible signal of no rate hikes in 2015 as some officials were concerned about Greece and China. Other investors read the same and interpreted it as only delaying rate hikes if there was major contagion. With a deal for Greece on the table, contagion out of Europe may be off the table by Sunday. Combined with strong economic data, interest rates were moving higher on Friday along with global equity markets.

Materials and energy were down this week due to the drop in commodity and energy prices; technology was down as well. Shares of Apple (AAPL), a major component in many technology funds, were down 5 percent at one point after sales of the Apple Watch were found to be down by approximately 90 percent from the initial launch period. Sales of Apple products always surge during the launch period, however, some reports are likely overstating the sales drop. Utilities, consumer staples and healthcare were the strongest performers thanks to falling interest rates early in the week.

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