Market Analysis

Beyond the Numbers

Risk Aversion May Stifle Buying Interest
8/31/2015 8:44 AM

The major U.S. index futures are pointing to a notably higher opening on Monday, with sentiment reflecting the uneasiness of traders amid lack of visibility into domestic interest rates and global economic outlook. Commodities are weaker, with crude oil down by close to a dollar per barrel. Risk aversion could stifle any kind of fight the markets may have to offer. Traders may also draw clues from the results of a regional business activity survey.

U.S. stocks rebounded in the week ended August 28th, as the major averages bounced off multi-month lows amid bargain hunting. Concerns about China and fears of a U.S. Fed rate hike were tempered, reigniting risk appetite in the markets.

Last Monday, the major averages plummeted, ending lower for the fifth straight session, amid concerns about growth in China. The averages plunged for the sixth straight session on Tuesday, as an early rally built on the back of a move by China to lower interest rates petered out in late trading.

Helped by dovish comments by a Fed official and positive economic data, the major averages rebounded strongly on Wednesday, as they recorded their biggest one-day advance in 4 years. The averages advanced strongly yet again on Thursday, thanks to positive U.S. GDP data, waning concerns about China and rally in commodity prices. The major averages ended a volatile session on Friday on a mixed note yet ended the week higher.

For the week ended August 28th, the Dow Industrials and the S&P 500 Index added 1.1 percent and 0.9 percent, respectively to 16,643 and 1,989, while the Nasdaq Composite outperformed with a 2.6 percent advance to 4,828.

Among the sectors, the Philadelphia Oil Service Index rallied 10.23 percent for the week. The Philadelphia Semiconductor Index added 6.10 percent, while the NYSE Arca Computer Hardware Index and the NYSE Arca Biotechnology Index rose over 3 percent each.

On the other hand, the NYSE Arca Gold Bugs Index slumped 8.36 percent, and the Dow Jones Utilities Average and the Philadelphia Housing Sector Index fell 4.26 percent and 3.07 percent, respectively.

Currency, Commodity Markets

Crude oil futures are slipping $0.99 to $44.23 a barrel after rising $4.77 or 11.79 percent to $45.22 a barrel in the week ended August 28th. The commodity received support last week from rising risk aversion and waning expectations concerning a September rate hike.

Gold futures, which fell $25.60 or 2.21 percent to $1,134 an ounce in the previous week, are currently slipping $5.30 to $1,128.60 an ounce.

Among currencies, the dollar ended mixed in the week ended August 28th, with the yen rising 0.27 percent against the greenback before ending the week at 121.71 yen. At the same time, the dollar rallied 1.17 percent against the euro to $1.1185.

The dollar’s strength was built on the back of some solid domestic economic data, including an upward revision to second quarter growth, and an interest rate cut by the Chinese central bank that allayed fears of a slowdown in China.

The U.S. dollar is currently trading at 121.31 yen and is valued at $1.1219 versus the euro.


The major Asian averages closed mixed, with volatility in Chinese market impacting risk sentiment. The strength of the yen in the wake of risk aversion pushed Japanese stocks lower and the Australian market also declined strongly.

Japan’s Nikkei 225 Index opened and fell further in early trading. After some sideways movement till the mid-session, the index fell again in the afternoon before ending down 245.84 points or 1.28 percent at 18,891.

Export stocks ended mostly lower, and financial, retail, utility and resource stocks also came under selling pressure. Meanwhile, defensive food, paper and some pharma stocks gained ground.

Australia’s All Ordinaries Index languished below the unchanged line throughout the session before ending down 52.60 points or 1 percent at 5,222. The market witnessed an across-the-board sell-off, with consumer staple, financial and energy stocks among the worst decliners of the session.

China’s Shanghai Composite Index closed well-off the lows of the session at 3,206, down 26.36 points or 0.82 percent, while Hong Kong’s Hang Seng Index ended a volatile session up 58.19 points or 0.27 percent at 21, 671.

On the economic front, a report released by Japan’s Ministry of Economy, Trade and Industry showed that industrial production fell 0.6 percent month-over-month in July, belying expectations for a 0.1 percent increase. In June, industrial production rose 1.1 percent. Annually, industrial output was up 0.2 percent, smaller than the 0.8 percent increase expected by economists.

Japan’s Ministry of Land, Infrastructure, Transport and Tourism reported that housing starts in Japan rose 7.4 percent year-over-year in July compared to the 16.3 percent increase expected by economists. Construction orders received by 50 big contractors fell 4 percent, reversing some of June’s 15.4 percent increase.

An Australian Bureau of Statistics report showed that company operating profits fell 1.9 percent sequentially in the second quarter. In the first quarter, profits were down 0.3 percent. Inventories were flat.

A separate report showed that private sector credit rose 0.6 percent month-over-month in July compared to the 0.5 percent increase expected by economists and the 0.4 percent rate in June. Annually, private sector credit was up 6.1 percent.

The Housing Industry Association reported that new home sales in Australia fell 0.4 percent month-over-month in July following a 0.5 percent increase in June.

The results of a survey by TD Securities and the Melbourne Institute showed that their monthly inflation gauge fell to 0.1 percent in August from 0.2 percent in July. However, annually, inflation is expected to have increased to 1.7 percent from 1.6 percent.


European stocks started on a negative note as risk aversion increases amid the uncertain outlook for global growth and the Fed rates. The political uncertainty brewing in Greece following the dissolution of the Parliament and calling for snap polls is also weighing in the minds of traders. The U.K. market is closed for a public holiday.

On the economic front, preliminary estimates released by Eurostat showed that eurozone annual inflation came in at 0.2 percent in August, the same rate as in July and June. Economists expected a 0.1 percent rate. The inflation rate is well below the European Central Bank’s ‘below, but close to 2 percent’ target for the medium term.

German retail sales recovered at a faster than expected pace in July, figures from the German Federal Statistical Office revealed. Retail sales advanced 1.4 percent on a monthly basis in July. Economists had forecast sales growth of 1.2 percent following a revised 1 percent drop in June.

U.S. Economic Reports

Jobs and private sector activity data are likely to predominate proceedings in the unfolding week. Traders may closely watch the Labor Department’s non-farm payrolls report for August, ADP’s private payrolls report for August, the results of the Institute for Supply Management’s manufacturing and non-manufacturing surveys for August , MNI’s Chicago area business barometer for August, Markit’s final manufacturing and service sector PMIs for August, the jobless claims data and the Federal Reserve’s Beige Book.

The results of some regional manufacturing surveys, some Fed speeches, the Commerce Department’s construction spending, trade balance and factory orders reports, all for July, the revised second quarter productivity and costs report, chain store sales results for August and announcements concerning the Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the economic events of the week.

MNI is scheduled to release the results of its manufacturing survey for the Chicago region at 9:45 am ET. Economists expect the business barometer to have edged up to 54.9 in August.

The business barometer rose much more than expected to 54.7 in July. The new orders and production indexes rose to 6-month highs, while the contraction in backlog orders and employment eased.

The Dallas Federal Reserve is due to release the results of its regional manufacturing survey for August at 10:30 am ET. The consensus estimate calls for an improvement in the general business activity index to–2.5 from –4.6 in July.

Stocks in Focus

Allergan (AGN) announced that it has successfully completed the acquisition of Naurex Inc. for a $560 million upfront payment net of cash acquired, $460 million of which is payable upon the closing of the acquisition and $100 million of which is payable by January of 2016, as well as potential R&D success-based and sales-threshold milestone payments.

Responding to the Public Service Commission of the District of Columbia's rejection of proposed Exelon - Pepco Holdings merger deal, Exelon Corp. (EXC) said that the companies believes their merger proposal is in the public interest, and will continue working to complete the merger, which all other jurisdictions have approved.

National Oilwell Varco (NOV) announced the appointment of Jose Bayardo as its Senior Vice President or SVP and Chief Financial Officer or CFO, effective August 28, 2015. Bayardo succeeds Scott Duff, the interim Chief Financial Officer.
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