Market Perspective for March 17, 2014

China, Ukraine and the Federal Reserve meeting will be the three big stories this week.

On Monday, shares had stabilized in China along with the rest of Asia. Copper prices were still stuck below the $3 level, but higher volatility and a positive trend could push the price higher. Over the weekend, the Chinese central bank increased the trading band on the yuan, allowing the currency to fluctuate up to 2 percent each day (from 1 percent previously). Traders responded by pushing the yuan lower in Hong Kong.

Faced with increasing numbers of defaults and worried about systematic risk, the pressure will be on the side of devaluation. This opens up a new avenue for risk since most investors still expect the yuan to increase versus the U.S. dollar. Also, even if they expect a decline, most analysts think the yuan will not fall further than 6.24 yuan to the U.S. dollar. That is only a drop of 1.3 percent away from becoming a reality, and that drop can now occur in one day. One bad day for the Chinese currency could have a significant short-term impact on global markets.

Aside from China, there is the situation in the Ukraine. This issue will not be as important to the markets unless the situation deteriorates further, which still seems unlikely. In our view, this is a distraction by Washington politicians as they cannot reach agreements on other issues. The Republicans, with good reason, believe they will have the Senate in 2015, and that would allow them to completely change the legislative agenda. President Obama’s economic agenda consists of political issues designed to stem the losses in November, but that will have little positive impact on the overall economy in the near future.

Finally, the Janet Yellen-led Fed is expected to taper again this week. Economic data was weak in January and February, but not so weak as to require a slowdown in the taper. Public statements by Fed officials also lean towards either a faster taper or even guidance on when interest rates will begin moving higher, though this is likely to come later in the year.

Economic Reports: It’s a light week for earnings reports and the Fed meeting will dominate.

Earnings: This is the last big week for earnings before the Q1 earnings season kicks off in April. FedEx (FDX), Oracle (ORCL) and Nike (KNE) all report this week. FedEx is always closely watched as an economic barometer and investors will look closely to see if there are weather related effects on its business. Oracle is also sometimes seen as a technology bellwether. Finally, two homebuilders, Lennar (LEN) and KB Home (KBH) report this week. Homebuilders have suffered in March, losing all their gains for the year.

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