China, oil, driving nervous markets | VailDaily.com

China, oil, driving nervous markets

Weekly Market Commentary
Ken Armstrong, Shane Fleury & Steve Shanley of The Northwestern Mutual Wealth Management Company – Vail Valley

So much for dog days. In what's usually a quiet time for stocks, when Washington, D.C. is deserted and trading volumes slow to a crawl as Wall Streeters go on vacation, the market erupted last week — and plummeted.

Concerns about the fragile state of China's economy, the tanking price of oil, and the timing of the Federal Reserve's first rate hike since 2006 combined to drive the major indexes to their worst week since 2001. Some opined that the six-year, post-recession rally had come to a close as the Dow fell more than 1,000 points into correction (a drop of at least 10 percent from a recent high) and its largest stock, Apple, entered bear territory, down 20 percent. The Nasdaq dipped to the cusp of a correction as well, and the S&P 500 is now off 7.5 percent from its record high set in May, falling below the 2,000-point barrier. Foreign markets, by and large, suffered even larger losses. Not surprisingly, the scramble for safe havens drove the yield on the benchmark 10-year Treasury down to 2.05 percent; it was as high as 2.5 percent in June.

The chief catalyst was the continued economic instability in China. Over the past month or so, Chinese stocks, propped up by purchases made with borrowed money, have tumbled, and the Chinese government has interceded more than once. The week before last, China let its currency fall against the dollar in an effort to make its exports more competitive. Vietnam and Kazakhstan, in response, subsequently let their currencies fall. The final straw seemed to have been when Caixin's Manufacturing PMI came in at 47.1, the lowest reading since March 2009 and the sixth consecutive month below 50, which separates improving from deteriorating conditions. That report followed on the heels of July's weak reports on investment, industrial output, retail sales and exports. Above all, perhaps, investors were concerned that the Chinese government doesn't have an answer to the gathering economic malaise. Furthermore, at week's end, the International Monetary Fund said that China would have to wait until at least next year to have the renminbi added to its list of favored currencies.

Oil heads south, again

A year ago, a barrel of oil cost $100, and recently there were signs that the plunging price was beginning to rebound. That changed last week after the Energy Department said that, because of higher production, the average price in 2015 will be $49 a barrel as opposed to the $55 forecast last month, and $54 in 2016, down from $62. On Friday, United States crude fell below $40 a barrel during intraday trading for the first time since 2009, further unnerving investors.

Fed becomes the wildcard

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On Monday, the Federal Reserve approved new rules for the nation's eight largest banks, which will have to meet new capital requirements on top of the $10 trillion in loans and securities that they currently hold. The new requirements, which won't take full effect until 2019, may have the indirect result of having banks voluntarily reducing their size. As the Fed's Chairwoman Janet Yellen said, "This final rule will confront these firms with a choice: They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system." The Fed was also in the news when economic projections from its June meeting "were inadvertently included in a computer file" – they're not supposed to be released for five years. Representative Jeb Hensarling (R, Texas) the chairman of the House Financial Services Committee, said the error "points to the urgent need for accountability reforms."

Tspiras schedules elections

For most of the summer it was the Greeks, not the Chinese, who were seen as most likely to trigger a global market slump. But no longer, with the third bailout having been negotiated and the first installment delivered so that Greece could make a €3.2 billion payment to the European Central Bank. The drama continues, and, after recent battles with his own party members who accused him of capitulating, Greece's Prime Minister Alexis Tsipras called for elections on Sept. 20. Tspiras said he'd step down and see if he would be returned to power, noting, "Your vote will determine if we represented you courageously in talks with the creditors." While Tsipras is expected to win, the question will be by how wide a margin – will he have enough seats in Parliament to form a government?

Germany signs off, again

Meanwhile, the third bailout was approved by Germany's Parliament, but, as was the case with Tsipras, there were numerous defections by members of Chancellor Angela's Merkel's party. Before the vote, Finance Minister Wolfgang Schäuble said that since the Greeks had already approved many of the new austerity measures, "it would be irresponsible not to use the opportunity now for a new start in Greece."

Housing's resurgence

Builder sentiment continued its recent roll, climbing to 61 in August, the highest reading since November 2005, the National Association of Home Builders reported. Housing starts increased 0.2 percent in July to an annual rate of 1.21 million, the Commerce Department said, and single-family starts grew at 12.8 percent, the fastest clip since December 2007. And existing home sales were up 2 percent in July to an annual rate of 5.59 million, the best total since February 2007. The only qualified report was that building permits fell 16.3 percent to an annual rate of 1.12 million in July, but that came after they hit an eight-year high in June. In other economic news, first-time jobless claims rose 4,000 to 277,000, while the four-week moving average climbed 5,500 to 271,500. The Consumer Price Index (CPI) was up 0.1 percent in July; core CPI, less food and energy, increased by the same 0.1 percent.

A look ahead

As investors wait to see what the new week will bring, they'll sift through the latest reports on the S&P/Case-Shiller Home Price Index, durable and capital goods orders, pending and new home sales, personal income and spending, and the first revision to second-quarter GDP, expected to be revised up from 2.3 percent to 3.2 percent.

This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

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