10/26/2014 0 Comments
10/26/14 the week ahead
Talk is cheap as the old saw goes, but in the past week talk could have made (or lost) you a great deal of money. Before the 16th the markets seemed in free fall as bad economic news was pushing down the markets almost daily; then the Federal Reserve started talking. With members talking about not raising rates or even delaying the end of bond purchases the market took comfort in the belief that the Fed will not allow the markets to fall off a cliff. Then self reinforcing data points were in stressed the past week, lowering inflation expectations, the strong dollar issue, or a lack in wage inflation causing the markets to rebound throughout the week.
Looking into next week the opportunities for more volatility is high. The US has important data points coming out (PMI, home sales, and consumer confidence) before the Fed meeting Wednesday. While it is very unlikely that the Fed will postpone the end of QE because of recent market volatility the language used by the Fed could help explain what they are looking to quell in the near term. In order to stem the recent threats of deflation, they may push the perceived time frame of a rate increase out further or they might talk down the dollar. Both of these could throw into question the longer term trends of stock, bonds, and commodities.
With commodities being priced in dollars it will be interesting to see if a combination of low prices and a weaker dollar spur more consumption, and if that will have an effect on prices. The debate of supply increases vs demand decreases in the commodity space is a hot one, but in reality it may be a little bit of everything that is caused the severe drop. Looking for catalysts that will change the current trend in commodities will lie in a mix of consolidation of supply and a marketable pickup in demand, where the latter will come from is what will keep a lid on any large rallies in the near term, but prices themselves may be the trigger for any large stimulative measures to take place.
Over the week I would expect volatility to increase going into mid week and a more clarifying trend to emerge at the end of the week. In terms of plays I think that the Fed will try to talk once again and downplay any near term strengths in the Dollar by becoming slightly more dovish in their speech clarifying that while the purchase program is over there is still a lot of data to be seen between now and the next rate increase. Globally the good news out of Europe on the bank stress test seems that it will provide some support to the equity markets there (perhaps less so with Italy) and the chance to buy into some select European stocks would prove a better play then sticking it out in US equities, if you had to choose between the two.
Markets have seen another volatile trading day, with markets having a quick jolt in the morning followed by further losses in the afternoon only to come back some 1.2% intraday to end the day down 0.80% on the S&P and less on the Nasdaq. This makes one wonder how much of this is a much needed correction or a more sustained sell off like we have seen in the past after stimulus was taken off and growth prospects taken down. Commodities have also been hit in the recent downturn, specifically energy. There are a lot of factors to be afraid of globally, but looking past the daily tape their are some potential areas of interest to me. For starters I have not been long this market and am still somewhat neutral at this point, but as time goes on I am increasing beta to key segments in the market. I have started positions in energy stocks much to my own internal debating, but in my current thinking it makes some sense. Overall i am short equities with a focus on Japan, and playing decreasing yields. With markets looking at slowing growth in China and poor data coming out of Europe, specifically Germany where much of the regions growth is concentrated, I started to look for catalysts that could change this trend, and thus challenge my current views. This led me to the possibility of China adding more stimulus and the Fed perhaps pulling back on some of the bullish expectations in terms of rates. This would be a plus for commodities if China started to add stimulus (the same with Europe, though I think outright purchases will continue to face challenges) and I also went long the pound and some emerging market currencies to the dollar as well to play a talking down of rate expectations in the US.
While it is too early to tell if this will be the case or if these positions will come to fruition, I will keep on the negative bias positions until I see more confirmation on the stimulative front.
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