Market Perspective for July 27, 2015

Domestic equities remain among the strongest in the world, but the coming days will likely see a pickup in volatility. U.S. equities have started the week lower, primarily due to a drop in the Chinese market which is weighing on commodities and foreign currencies. A Federal Reserve meeting this week may ultimately determine the market’s direction, as investors learn whether interest rates will be increased in September.

A plunge in the Chinese stock market is rattling global markets. The Chinese government hinted it may start lifting some of the extraordinary measures used to prop up the stock market in July; investors reacted by quickly dumping shares. The Shanghai Composite fell 8.5 percent, not far from the daily limit of 10 percent as investors who have ignored China’s slowing economy for the past few years are suddenly paying more attention to their troubles. Due to false data out of China, no one is sure how fast the economy is growing, but at best it is probably closer to 3 percent or 4 percent a year.

The main impact of the weak China story is felt in commodity markets. Major industrial commodities are at multi-year lows, including copper, iron ore, coal. Oil is at its 52-week low and is falling again at the start of the week. Commodity related currencies such as the Australian dollar and Canadian dollar are rebounding today following a recent drop, but they are also at multi-year lows, as are emerging market currencies.

This increase in volatility will continue through mid-week at a minimum with the Federal Open Market Committee meeting on Tuesday and Wednesday. If a September rate hike is coming, the Fed is likely to telegraph the move in Wednesday’s policy statement. Interest rates are moving lower in response to falling commodity prices, but U.S. economic data is getting stronger.  Last week’s jobless claims were at a 30 year low. This Thursday, the first estimate of second quarter GDP will be released. The Atlanta Fed GDP Now model forecasts 2.4 percent growth and the average of economist estimates is currently at 2.5 percent.

This is a big week for pharmaceutical and biotechnology earnings. Merck (MRK) and Pfizer (PFE) report, as does Amgen (AMGN) and Gilead Sciences (GILD). Amgen and Gilead are two of the few profitable biotech companies and their earnings make up a large chunk of the entire sector’s earnings. Other companies reporting this week include Ford Motor (F), United Parcel Service (UPS), Twitter (TWTR), DuPont (DD), Facebook (FB), MasterCard (MA) and Procter & Gamble (PG). Oil giants Exxon Mobil Corp (XOM) and Chevron (CVX) will also announce earnings. The main drag on S&P 500 earnings growth in the second quarter remains the energy sector, so these two firms will be closely watched.

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