SQUAWK BOX WEEKLY UPDATE – 9/21/15

SQUAWK BOX WEEKLY UPDATE

Week 2 – Monday September 21, 2015

Markets Performance / Current Trading Range

  • The S&P 500 was fairly unchanged last week, only dropping by -0.2%, falling from 1,961 on Friday, 9/11 to a close of 1,958 on Friday, 9/18.
  • Despite the modest move overall, volatility continues to be the name of the game, with the benchmark index gyrating within a 60-point range* (*500 point range for the DJIA) during the five-day period.
    • From Friday’s (9/11) close through the all-important Fed announcement on Thursday (9/17), the market rose by as much as +3%, only to collapse and give up those entire gains on late Thursday afternoon into the close on Friday.
  • Today’s Monday trading was another fairly volatile day (nearly 200 point intraday swing on the DJIA), with the S&P rising nearly +0.5% to close at 1,967. While we recovered a bit today, the markets are still off -7.7% from its all-time record closing high of 2,131 reached on 5/21/15.

Recent Trading History

  • The S&P 500 was range-bound (nearly 100 point range) for roughly three months (May-July), trading sideways between 2,040 and near record territory of 2,120, before falling convincingly below the 200-day moving average in late August.
  • Volatility has increased since late August, as the S&P 500 dropped as much as -12% to a recent low of 1,867 (level last seen in October of 2014).
  • Recent losses have been pared a bit, with the broader markets recovering just over +5% over the last few weeks.
  • Nevertheless, volatility has returned these past two weeks, with 500-1,000 intraday swings once again occurring on a more regular basis.

Market Drivers (*Level of Importance/Weight in Descending Order)

SHORT-TERM (ST) DRIVERS:

  1. Federal Reserve’s Interest Rate Hike
  2. Continuation of Risk-On/Risk-Off
  3. Chinese Economy Slowing / Market Turmoil

 LONG-TERM (LT) DRIVERS:

  1. Currency Wars
  2. Economic Data
  3. Global Debt Levels
  4. Geopolitics and Terrorism

Major Events on the Horizon:

  • Janet Yellen speaks after the market closes on Thursday (9/24) afternoon – traders will be listening for additional comments about the potential timing of a Fed rate hike
  • FOMC Decision on Interest Rates
    • October 27-28
    • December 16 (with Press Conference)
  • ECB President Mario Draghi is due to testify on Wednesday (9/23) in front of European Parliament’s Economic and Monetary Policy Committee – any mention of further QE or asset purchases, we could see even further strengthening in the dollar (further weakening any chance of a Fed rate hike this year).
  • UN General Assembly’s 70th session this week – with Pope Francis addressing the UN
  • China’s President Xi Jinping and President Barack Obama will meet for the fifth time, Xi’s first state visit later on September 25.
  • Another Government Shutdown? September 30/October 1 could present a partial government unless lawmakers provide money to keep government functioning.

Glossary:

  • Risk-On / Risk-Off – Since 2008, the risk-on environment describes when investors pour money into the markets (taking risk) in large part due to the expectations that easy monetary policies will continue to lift asset prices. More recently, risk-off trading has taken place throughout much of 2015 with the new expectation that we could see the Fed begin to take away easy monetary policy.
  • Dovish / Hawkish – Dovish monetary policy refers to the Fed (central bank) continuing to maintain easy and accommodative monetary policy, pushing for further inflation. On the contrary, a hawkish outlook or action signals that the Fed (central bank) will likely raise interest rates to “cool” down an overheated economy and possibly higher inflation.
  • Tightening –Tightening refers to the Fed (central bank) withdrawing its accommodative and stimulative monetary policies, and begin raising interest rates.
  • Zero-Bound – Sometimes referred to as “ZIRP” or Zero-Interest Rate Policy. Since 2008, the Fed has been “stuck” with their Fed Funds Rate at 0% – 0.25%, unable to normalize borrowing conditions back to pre-crisis levels.

 

References:

Black, Jeff. (2015). Yellen Pause Ups Pressure on Draghi as Global Pessimism Mounts. Bloomberg: http://www.bloomberg.com/news/articles/2015-09-20/yellen-pause-ups-pressure-on-draghi-as-global-pessimism-mounts

Burton, Katherine. (2015). Ray Dalio Is Worried About Next Downturn as Fed Prepares Move. Bloomberg: http://www.bloomberg.com/news/articles/2015-09-17/ray-dalio-is-worried-about-next-downturn-as-fed-prepares-move

Garber, Jonathan. (2015). 10 things you need to know today. Business Insider: http://www.businessinsider.com/opening-bell-september-21-2015-2015-9

Federal Reserve Board. (2015). Press Conference with Chair of the FOMC, Janet L. Yellen:

https://www.youtube.com/watch?v=Z5-Jc3l42-g

Ogg, Jon C. (2015). Very Negative Philly Fed May Be Due to Sentiment and Market Noise. 24/7 Wall St: http://247wallst.com/economy/2015/09/17/very-negative-philly-fed-may-be-due-to-sentiment-and-market-noise/

Schiff, Peter. (2015). Ep. 110: Yellen Admits Rates Could Stay at Zero Forever:  https://www.youtube.com/watch?v=gi1v8AvZY4k

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