For the week ending January 29, 2016, the stock market posted solid gains. On Friday, both the Dow and the S&P 500 had a massive rally with the Dow up 2.30 percent for the week and the S&P 500 up 1.70 percent; the Nasdaq was up only 0.30 percent. In other news: the Bank of Japan (BOJ) sends interest rates negative; oil makes a comeback; and, traders are anticipating no Fed rate hike for 2016. Below is a recap of the markets for each day of the week.
The markets dropped on Monday as crude oil prices dropped sharply. Oil dropped $2.25 to $29.75. The Dow dropped -1.3 percent to 15,885; the S&P 500 dropped -1.56 percent to 1,877.
On Tuesday, the markets rebounded as crude oil prices bounced sharply up. Oil rose $1.50 to $31.25. The Dow rose 1.8 percent to 16,167; the S&P 500 rose 1.41 percent to 1,904.
The markets dropped sharply on Wednesday after the release of the FOMC minutes indicating a possible rate hike in March is still on the table. Oil rose $0.75 to $32. The Dow dropped -1.4 percent to 15,944; the S&P 500 dropped -1.09 percent to 1,883.
The markets on Thursday recovered half its losses from Wednesday as Russia and OPEC talk about reducing oil production. Oil rose $1.50 to $33.50. The Dow rose 0.80 percent to 16,069; the S&P 500 rose 0.55 percent to 1,893.
The markets Friday rose sharply on a surprise rate cut by the BOJ (negative interest rates) that demonstrates central banks will continue to take action to support economic growth. Oil rose $0.75 to $33.75. The Dow rose 2.50 percent to 16,466; the S&P 500 rose 2.48 percent to 1,940.
A broad stock market rally on Friday posts the biggest gains in nearly five months. Markets overseas jumped as the Bank of Japan went to negative interest rates to help stimulate its economy. The Dow surged 2.5 percent (397 points); the S&P 500 surged 2.5 percent (47 points); and, the Nasdaq composite surged 2.4 percent (107 points). Despite these gains, all the major indexes are still in the red for 2016.
The Bank of Japan goes negative on interest rates for the first time in history. In a surprise move, the BOJ shocked markets worldwide by moving interest rates into negative territory. In a 5-4 vote the central bank board cut interest rates to -0.1 percent (from 0.0 percent). In addition, the bank will maintain its quantitative easing program expanding its asset base by 80 trillion yen ($980 billion) annually. The program includes buying government bonds and increasing investments in real estate trusts and electronically traded funds. Negative rates will encourage Japanese banks to reduce BOJ deposits and increase lending to businesses.
Crude oil prices rise on hopes of a production deal. OPEC renewed calls for rival producers to cut oil production in concert with its members. This has prompted Russia to start talks on a deal with OPEC, a move that Russia has refused to do for 15 years. Oil rigs in operation in the U.S. has fallen to 498, down from 1,223 a year ago. If production deals occur, analysts believe oil prices will reach $45 per barrel by year-end; however, many analysts are skeptical that this will occur.
Futures traders are betting that the Fed will not raise interest rates this year. As mediocre economic news continues and worldwide markets remain weak, traders are not expecting any further rate hikes till February 2017. This contrasts with the latest FOMC minutes that indicated that the Fed projects economic growth will continue and the four scheduled rate hikes for this year is still on the table. With fourth quarter GDP growth at only 0.7 percent, the probability of a rate hike in March is dwindling (now 8 percent, down from 22 percent).
The bottom line: global risks are the primary concern this year as a weakening global economy threatens to weaken the U.S. economy. All hopes are pinned on the consumer which has remained strong. If real wages start to increase (leading to a rise in inflation), U.S. consumer demand is likely to increase which should bolster the global economy.
The focus next week in the U.S. will be Friday’s jobs data. Economic growth is soft and employment growth may be slowing, but still remains respectable. While manufacturing remains weak, construction continues to be strong (along with ISM non-manufacturing). Globally, the week was dominated by the rate cut by the BOJ that resulted in negative rates. Labor force data will be in focus for Germany, the U.S., Canada, and the Eurozone. In addition, the focus will be on the following: UK (Bank of England Monetary Policy Announcement, PMI Services); Eurozone (PMI Manufacturing, Unemployment, PMI Services & Composite, Retail Sales); Germany (PMI Manufacturing, Unemployment); China (PMI Manufacturing); and Japan (PMI Manufacturing).
Year-to-date the markets are down: Dow -5.5%; S&P500 -5.1%; Nasdaq -7.9%.
The Markets for the past week were: DJIA up 2.3%; S&P500 up 1.7%; Nasdaq COMP up 0.5%.
Commodities (ETFs) for the past week were: Gold (GLD) up 1.09%; Silver (SLV) up 1.57%; Oil (OIH) up 6.77%; Dollar (UUP) up 0.00%; 30-year Bonds (TYX) dropped 6 basis points to 2.76%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 20.20%. This reflects the rebound in oil prices and the rate cut by the BOJ to negative rates.
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 – Personal Income and Outlays
o Tuesday – Motor Vehicle Sales
o Wednesday – EIA Petroleum Status Report, ADP Employment Report, PMI Services Index, ISM Non-Mfg Index
o Thursday – Jobless Claims, Productivity and Costs, Factory Orders
o Friday – Employment Situation, International Trade
If you’re trading options, it is suggested trading Put or Call Credit spreads for next week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1839 and 2046 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.