For the week ending February 26, 2016, the stock market finished up as crude oil prices continue to climb. On a rollercoaster week, both the Dow and the S&P 500 ended moderately higher at the upper end of their channels. In other news: G-20 focuses on fighting global recession; GDP revision points to weakness; and, President of OPEC says crude oil production freeze is likely. Below is a recap of the markets for each day of the week.
The markets rose on Monday as crude oil prices rallied. Oil rose $1.39 to $33.35. The Dow gained 1.4 percent to 16,619; the S&P 500 gained 1.45 percent to 1,946.
On Tuesday, the markets fell significantly as crude oil prices fell after Saudi Arabia announced it would not cut oil production. Oil dropped $1.98 to $31.37. The Dow dropped -1.1 percent to 16,431; the S&P 500 dropped -1.25 percent to 1,921.
The markets rose on Wednesday as crude oil prices rose again. Oil rose $0.85 to $32.22. The Dow gained 0.4 percent to 16,484; the S&P 500 gained 0.44 percent to 1,930.
The markets on Thursday rose sharply on a strong rise in durable goods orders and a jump in crude oil prices. Oil gained $0.86 to $33.08. The Dow rose 1.3 percent to 16,697; the S&P 500 rose 1.13 percent to 1,952.
The markets Friday ended lower as oil prices declined despite strong gains for both personal income & expenditures and inflation. Oil dropped $0.24 to $32.84. The Dow declined -0.2 percent to 16,659; the S&P 500 declined -0.19 percent to 1,948.
U.S. stocks close lower Friday but post a 2nd straight positive week. The gain is largely due to an increase in crude oil prices, despite weakness in corporate profits, global economic growth, and low inflation. The Dow gained 1.5 percent (248 points); the S&P 500 gained 1.6 percent (30 points). Crude oil prices rose 2.75 percent ($0.88). The economic news was mostly positive and this has led to an increase in the probability of a rate hike in 2016. The Federal-funds futures, used by traders to bet on central-bank policy, shows the probability of a rate hike in December 2016 at 50 percent.
G-20 meeting in Shanghai is addressing slow global growth as commodity prices decline. The big question is can they reassure the financial markets that deflation will be effectively dealt with. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) are counting on it. The focus is on coordination between officials of major economies and a solution for China’s transition to a weaker currency. Some ideas being considered to improve global growth: Germany believes in medium-term structural reforms in the labor market; China believes in providing the markets a bigger role; and, the U.S. believes in increasing infrastructure spending. All agree that they should avoid a currency war.
The fourth quarter GDP revision for 2015 to 1 percent is, unfortunately, not good news. This is because the rise (from 0.7 percent) was mainly due to a larger stockpiling of inventories that could cause a negative impact on first quarter GDP this year. With the economy in 2016 starting out on a weaker note, an increase in inventories is not good news. Inventories rose by $81.7 billion (from $68.6 billion originally reported); the increase was largely due to a technical alteration in inventory calculation, and it suggests companies have more unsold goods than expected. Consumers boosted spending by 2 percent in the fourth quarter, but businesses spent sharply less with investment in equipment sinking -6.6 percent.
OPEC member says production freeze will lead to $50 per barrel oil. Despite disagreements amongst cartel members, the Nigerian oil minister, Emmanuel Ibe Kachikwu, said that OPEC will forge an agreement amongst its members to freeze oil production at current levels. The Minister for energy in Qatar and the President of OPEC are leading the drive to build consensus on a freeze. If it succeeds, then the large inventory of oil will be worked off in time, and oil prices are expected to jump to around $45 to $50 by year-end.
The bottom line: while inflation is still low, it is rising due to strength in the consumer. Strong consumers along with rising inflation improve the possibility of a rate hike. A strong employment report this Friday will make the FOMC debate hotter.
The focus next week in the U.S. will be Friday’s employment report. In addition, other data of importance will be pending home sales on Monday; construction spending and ISM manufacturing index on Tuesday; and, ISM’s non-manufacturing report on Thursday. Globally, the PMIs and the G-20 meeting of finance ministers and central bank governors. In addition, the focus will be on the following: UK (PMI Manufacturing, PMI Services); Eurozone (Harmonized Index of Consumer Prices, PMI Manufacturing, Unemployment, Producer Price Index, PMI Services & Composite, Retail Sales); Germany (Retail Sales, PMI Manufacturing, Unemployment, PMI Services & Composite); China (PMI Manufacturing, CFLP Manufacturing Index); and Japan (Industrial Production, Retail Sales, Household Spending, Unemployment Rate, PMI Manufacturing, PMI Services).
Year-to-date the markets are down: Dow -4.5%; S&P500 -4.7%; Nasdaq -8.3%.
The Markets for the past week were: DJIA up 1.5%; S&P500 up 1.6%; Nasdaq COMP up 2.4%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.40%; Silver (SLV) down -4.23%; Oil (OIH) up 2.03%; Dollar (UUP) up 1.48%; 30-year Bonds (TYX) rose 3 basis points to 2.64%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 19.81%. This reflects the rise in oil prices and strong economic data.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full:
o Monday – Chicago PMI, Pending Home Sales Index, Dallas Fed Mfg Survey
o Tuesday – Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg Index, Construction Spending
o Wednesday – EIA Petroleum Status Report, ADP Employment Report, Beige Book
o Thursday – Jobless Claims, Productivity and Costs
o Friday – Employment Situation, International Trade
If you’re trading options, it is suggested trading Put Credit spreads for next week at 2.5 standard deviations or greater. Expect the price of the SPX to fall within 1812 and 2028 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.
