It was a volatile week for the markets both here and abroad as stocks ricocheted from one headline to another. Last Monday stocks were reacting to the Greek vote of "no" to accept the Troika's new bailout terms. Tuesday saw a big rally off the market's intraday lows only to be crushed again the following session. One of the big stories on Wednesday was a shutdown of the NYSE where trading was halted for almost four hours. This was preceded by a network-wide outage that grounded all flights for United Continental. It was followed by a temporary outage of the Wall Street Journal website. The U.S. government and the NYSE claim that hackers were not responsible for the shutdown.
Rumors persisted throughout the week that Greek leaders had drafted a proposal that accepted a lot of their creditors' demands.
On Friday we saw stocks rise around the world. Chinese stocks rallied as the government throws billions at their falling stock market to stop the sell-off. In Europe the market rallied on a new proposal from Greece that was much more cooperative and increased the likelihood of a deal. Meanwhile here in the U.S. the Federal Reserve Chairman Janet Yellen made headlines with her desire to raise rates but concerns about the labor market.
Asian market rally on Friday (by YahooFinance)
European market rally on Friday (by YahooFinance)
The small cap Russell 2000 and the big cap Dow Jones Industrials both managed a gain for the week. The NASDAQ composite and S&P 500 closed down for the week although the decline in the S&P 500 was so small it might as well have been unchanged. Semiconductors were big losers with a -3.8% drop in the SOX index last week. Crude oil turned south with a -6.5% decline. Oil inventories in the U.S. rose for the second week in a row when analysts were expecting a decline. The IEA lowered their global crude oil demand forecast. Plus there is the potential for a deal with Iran and all of these factors pressured oil lower. This weighed heavily on the oil and oil service stocks.
Two weeks ago the world was shocked when Greek Prime Minister Alexis Tsipras declared a referendum on whether or not Greece would accept new bailout terms by its creditors (the Troika: EU, ECB, and IMF). A week ago we were surprised again. Previously, polling among Greeks showed a vast majority of them wanted to stay in the Eurozone and would vote "yes" on the referendum. Thus it was big surprise when the "no" vote won with a 61% majority.
On Wednesday (July 8th) the Wall Street Journal was reporting that Greece would submit a new 3-year bailout proposal. Sure enough the next day Greek leaders did submit a new proposal. This time it was a shock for the Greeks. The new proposal was almost identical to the one that Tsipras had rejected two weeks early and forced his people to vote on. The majority voted no and yet Tsipras essentially capitulated to nearly all of the Troika's demands. The new deal would force Greece to cut spending, raise more taxes, and modify their public pensions and retirement age.
Details emerged on Friday. The new proposal is for 53.5 billion euros in rescue funds to pay for all of Greece's loan obligations between now and June 2018. The Greek Parliament needs to approve this new offer and then it must be approved by the Eurozone.
One main issue separates the new Greek proposal from the one the Troika presented two weeks ago and that is debt restructuring. Greece wants some of its debt erased. Unfortunately Germany's Finance Minister Wolfgang Schaeuble said debt forgiveness would be impossible since it infringes on "the system of the European Union." What he didn't say is that if the Eurozone forgave any debt from Greece then Spain and Portugal would immediately want the same deal for their bailout debts.
One big question that many Greeks are pondering is why did Tsipras betray them? He urged his country to vote "no". They obliged with 61% voting "no". So why did Tsipras flipflop and present a deal that was nearly identical to the one he previously maligned and rejected?
His own party, the leftwing Syriza, is shocked by his sudden move to accept a deal. There have been reports of a rebellion among his supporters. Tsipras could have a tough fight ahead of him to get a majority of Greek parliament to accept the new deal.
I'm sure most Greeks are wondering if and when the banks will open again. Greek banks have been closed for two weeks and no one knows when they will reopen. There has been a growing worry that if they don't open soon they never will. A week ago it was feared that they were down to their last 500 million euros. They reduced the amount of money citizens could withdraw from ATMs from 60 euros to 50 euros. Yet that hasn't stopped the outflow, which has been estimated at almost 100 million euros a day. Customers have been lining up at midnight so they'll be first in line to withdraw cash before the ATMs run out.
As of Sunday there seemed to be some hope that Greece and its creditors were closer to another deal. Eurozone President Jeroen Dijsselbloem said the two sides have "come a long way" in the last two days of negotiations. French leaders have been very positive on Tsipras' reversal and encouraging a deal among the Eurozone members. Yet German Chancellor Angela Merkel, who has been feeling pressure at home to reject a deal, is calling for Greece to surrender its fiscal sovereignty to restore trust to its creditors. The next big deadline for Greece is July 20th where they are supposed to make a 3.5 billion euro debt payment to the European Central Bank.
Chinese Market Volatility
The bigger story last week may have been the bear market plunge in the Chinese stock market. Last weekend the Chinese government announced they were injecting 1.8 trillion yuan of liquidity into the financial system. This followed an interest rate cut the prior week. This liquidity news helped spark a +8% bounce in the stock market on Monday but gains faded to just +2.4% by the closing bell.
The sell-off continued on Tuesday with a -1.3% decline and on Wednesday with a -5.9% plunge. The Shanghai index was down more than -30% in just the last three weeks. Investors were panicking. Corporations were panicking as well. By Wednesday nearly half of companies with class-A shares on the Shanghai market had requested their stock halted for trading. This is a blatant attempt to avoid any further losses in their market value. We are talking about more than 1,300 companies. Could you imagine the reaction if that happened on the NYSE? In China a company can request their stock be halted and it can stay halted for months or even years if they get regulatory approval.
The three-week plunge in the Chinese stock market had erased more than $3.2 trillion worth of market value. To put that number into perspective, that's like seeing the French stock market crash and burn to zero.
The average PE on the Chinese market had fallen from 108 to 57. Compare that to the S&P 500, which currently trades with a PE of 20.
Chart of the Shanghai Stock Exchange
The Chinese government has been desperately trying to stop the slide and so far they have resorted to a number of tactics. They convinced twenty of China's biggest brokerages to spent $19 billion (about 120 billion yuan) on stocks, and these firms promised not to sell until the market had rebounded to a specific level. They have suspended all IPOs for further notice. They have announced a ban on selling stock if you're a major stockholder or corporate executive of a publically traded company for the next six months.
Two weeks ago they announced a special task force to investigate market manipulation. This past week they announced another task force to look into short sellers.
The final trick may have been the news out Thursday morning where the People's Bank of China (central bank) said they would lend money to the state-run Securities Finance Corp. who will use the money to "support" the stock market. That's on top of the 260 billion yuan (about $42 billion) the Securities Finance Corp. has already lent to 21 brokerages to buy stocks.
It appears that this central bank backstop was enough to stop the market slide. On Thursday the Shanghai index bounced +5.8%. The rally continued on Friday with a +4.5% gain. It was the biggest two-day rally since 2008.
The question now is what happens next. China has been trying to boost consumer spending for years. They see how 70% of the U.S. economy is consumer spending and they want their 1.35 billion people to spend more and boost their economy, which is growing at its slowest pace in years. The government had been encouraging people to invest in the stock market. Leaders were probably hoping the wealth effect, when consumer feel wealthy because of their stock holdings, would generate more spending.
Now the opposite could happen. Yes, it is true that prior to the sell-off the Chinese stock market had doubled (+100%) in less than a year. Unfortunately, as humans, we remember pain a lot more vividly. The sell-off in the last three weeks may have scarred investor sentiment. There is a concern among analysts and investors that the Chinese market sell-off may hurt consumer spending going forward. UBS China analysts Wang Tao is arguing this will not happen. In a note out on Friday, Tao suggested that any impact to the Chinese economy by the market decline will likely be limited. Stocks only account for about 12% of household wealth in China.
There was not any significant economic data for the U.S. last week. Any report would have been overshadowed by the Chinese market sell-off and Greek crisis anyway. We did hear from Federal Reserve Chairman Janet Yellen on Friday. She spoke in Cleveland and repeated her desire to raise rates later this year. However, she claims the outlook for the U.S. economy and labor market remains "highly uncertain". This could be her excuse to hold off on raising rates. The Fed hasn't raised rates since 2006. Their lending rates have been near zero since 2008.
Yellen speaks before the House and the Senate this week. She will probably be asked directly by both congressmen and senators on when the Fed will raise rates next. You might recall that the IMF has twice asked the Fed in the last few weeks to postpone any rate hikes until 2016. The IMF warns that raising rates now could stall the U.S. economy.
There are four more FOMC meetings between now and yearend. Current consensus among analysts suggest the Fed is likely to raise rates in December this year.
Overseas Economic Data
It was a relatively quiet week for economic data overseas as well. We did hear from a few central banks. The Reserve bank of Australia left their interest rate unchanged at 2.0%. The Bank of Korea left their interest rate unchanged at 1.5%. The Bank of England also left their rate unchanged at 0.5%.
Meanwhile Germany said their industrial production in May was flat for the month +0%, which was less than expected and below April's +0.6% gain. Germany also reported factory orders in May were up +0.2%, which is a sharp drop from the prior month's +2.2% gain. Spain announced that their industrial production in May was up +3.4%. That's not only above expectations but up sharply from April's +1.7% gain.
It was a volatile week for the S&P 500 with the index churning sideways between support near 2,045 and resistance in the 2,085 region. The big bounce on Friday left the S&P 500 virtually unchanged for the week and up +0.9% year to date.
If the market rallies the S&P 500 faces resistance around 2,085 and again near 2,100 and its 50-dma. If stocks sink the index should find support near 2,040 and near the 2,000 mark.
Five-Day chart of the S&P 500 index:
chart of the S&P 500 index:
The NASDAQ composite fell to round-number support near 4900 before bouncing. Coincidentally this lined up with a bounce from a bullish trend line of higher lows going back to the October 2012 low.
The NASDAQ did post a loss for the week and that reduced its 2015 gains down to +5.5%. The 5,000 level is immediate resistance. The 50-dma overhead near 5,040 is also potential resistance. Although I suspect that if the market rallies we could see the NASDAQ run towards resistance near 5,100. On the other hand, if stocks retreat, we can look for short-term support at 4,900 and then again near 4,800 (and its 200-dma near 4,815).
chart of the NASDAQ Composite index:
Weekly chart of the NASDAQ Composite index:
The small cap Russell 2000 index ($RUT) eked out a gain for the week thanks to the big bounce on Friday (+1.4%). Unfortunately the rally on Friday stalled right at resistance beneath the simple 50-dma. The index is still below its prior trend line of support, which is now new resistance.
The 1,250-1,280 area could be really tough for the $RUT to work through with a lot of congestion in that area. If stocks retreat then the 1,200-1,220 area should offer some support.
Year to date the $RUT is up +3.9%.
chart of the Russell 2000 index
Economic Data & Event Calendar
The week ahead is very busy for the calendar. There are several economic reports in the U.S. including both the New York and Philadelphia regional fed surveys. We'll also see the wholesale and retail inflation reports (PPI and CPI).
The ECB is unlikely to change its interest rate policy midweek but markets will be paying attention to Draghi's press conference. Plus, Yellen speaks for two days in the U.S. capital.
We are also in the early stages of Q2 earnings season.
- Monday, July 13 -
Latest deadline for the Iranian nuclear negotiations
- Tuesday, July 14 -
U.S. Retail Sales for June
Business inventory data
Eurozone Industrial Production
- Wednesday, July 15 -
Producer Price Index (PPI)
New York Empire State manufacturing data
U.S. Industrial Production
Federal Reserve Beige Book
Bank of Japan rate decision
Fed Chairman Yellen testimony before the House
- Thursday, July 16 -
Fed Chairman Yellen testimony before the Senate
Philadelphia Fed survey
NAHB Housing market survey
ECB interest rate decision
ECB President Mario Draghi press conference
- Friday, July 17 -
Consumer Price Index (CPI)
Housing Starts & Building Permits
University of Michigan Consumer Sentiment Survey
Additional dates to be aware of:
July 19th - Eurozone Summit on Greece
July 29th - FOMC meeting (end of two-day meeting)
Hopefully investor attention will focus on earnings. Right now expectations are relatively low and that should make it easier for companies to beat estimates. There are almost 40 S&P 500 companies reporting earnings in the week ahead. These include several large banks and financial companies (BAC, BLK, C, GS, JPM, and WFC). We'll also hear from technology companies like Google (GOOG) and Intel (INTC).
It's probably wishful thinking on my part to hope the market focuses on earnings and not China or Greece. If the Chinese market continues to bounce it will certainly help. The Chinese government might be able to prop up their market for a little while but it won't last forever. Meanwhile the Greece story will be front and center on Monday as the Troika is expected to formally reply to Greece's proposal submitted last week. Everyone says the two sides are close to a deal. I'm just surprised Greece hasn't seen more unrest considering Tsipras' unexpected reversal.
Iran Nuclear Negotiations
Another big story for Monday could be the Iran nuclear negotiations. The last deadline was July 7th but they blew past that and gave themselves until Monday night. It's the 7th time they have extended the deadline during the current round of negotiations. It seems that nerves are getting raw among the negotiators with reports of shouting matches between U.S. and Iran diplomats.
Meanwhile the U.S. is working on $6 billion in military sales to our allies in the Middle East. As Iran's regional power grows the country's neighbors are feeling uneasy. According to Bloomberg the U.S. is planning to sell radar systems, hellfire missiles, and military helicopters.
Another story you may not have heard much about is Iran giving a $1 billion line of credit to the Syrian government led by President Bashar al-Assad. The U.S. wants Assad to step down and a new government to start that is "inclusive" of all the people of Syria. Shiite Iran is supporting fellow Shiite Assad who is battling Sunni terrorists from ISIS.
If Iran and the P5+1 nations do agree to a deal it will likely spark another decline in oil prices. If they don't, then oil could spike higher on geopolitical fears of a military option to degrade Iran's nuclear infrastructure.
The U.S. stock market will likely be held captive to headlines overseas. Investors will be watching the Chinese market for signs of stabilization. They will also be watching for the next move in the Greek negotiations.