Market Perspective for March 24, 2014

Investors will continue to digest the Federal Reserve’s policy decision over the next few days. Last week saw shares dip on Wednesday, the day of the policy statement and Janet Yellen’s press conference at which she let slip that interest rates could rise in early 2015 (depending on the data). Shares rallied on Thursday, but then slipped on Friday as some momentum leading sectors such as biotechnology took big hits.

China provided a boost late last week when the securities regulator announced it would allow the issuance of preferred shares. Bank stocks, likely to need another round of capital infusions, rallied sharply on the news. Qualified foreigner investors also saw regulations eased: they will not be able to buy up to 30 percent of a company’s shares, an increase of 10 percentage points. Regulations on the Chinext market of small and emerging companies were loosened as well.

Macro and real estate news out of China did not improve, however, and this week will be a test for the market. Copper remains an important commodity to watch here. The metal was whipsawed up and down last week as it tried repeatedly to break above $3, only to get pushed back into the low $2.90s. A move above $3 would signal traders do not believe there is systematic risk from China’s ongoing defaults. A break to a new 52-week low for copper would bring out sellers and pull all asset markets lower. Also worth paying attention to is the Chinese yuan. It remains under pressure and a further devaluation below the 6.24 level could set off a new round of selling. Finally, investors should keep an eye out for some government reform or stimulus announcements. The news on Friday led to a big rally in mainland shares and the government may decide to issue more such pronouncements in a bid to push asset markets higher.

Economic Reports: The Case-Schiller housing index for January is out this week. Consumer confidence for March, new home sales and building permits in February are on tap. Look for flash PMI numbers for China and the U.S. as well.

Earnings: Walgreen (WAG), Carnival (CCL), Paychex (PAYX), Blackberry (BBRY) and Lululemon (LULU) report this week. A large number of important China-listed companies also report this week, everything from banks to automakers to coal miners, which will add to volatility given the heightened awareness of China’s economic situation.

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