Market Commentary Week ending February 21, 2014
Overview and Observation: The past week’s market activity was driven by a number of factors including economic data, geopolitical events, and concern over safety at the Sochi Olympics and perceptions of U.S. Federal Reserve actions going forward. On Friday the Dallas Fed President Richard Fisher said the Fed “should continue to reduce the pace of its asset purchase program.” In conjunction with his statement the St. Louis Fed President Bullard, said the U.S. economy is “headed for a good year of growth and expects the Fed to continue tapering its bond buying program.” Statements by Fed members have a material effect on investor psychology both here and abroad as the U.S. trading partners are also affected by changes in U.S. Fed rate policy. A change in U.S. interest rates or even the perception of change affects the dollar and its relationship with other currencies. International trade is affected by changes in currency values and is a determining factor for investors as well. Now for some actual information to hopefully guide them through the potential pitfalls that could affect their investments.
Interest Rates: March treasury bonds closed Friday at 133-05, up 14/32nds as weaker than expected U.S. housing data gave rise to concerns over the recovery in housing. Existing home sales declined by 5.1% to 4.62 million in January against expectations of a decline to 4.65 million after the preliminary December 4.87 million. The disappointment in housing is of concern since the number of industries tied to housing could exacerbate an already weak labor condition. We continue to expect yields to be subdued with no action expected by the U.S. Federal Reserve given the weak economic data even as certain Fed members call for continued tapering.
Stock Indices: The Dow Jones industrials closed at 16,103.30, down 29.93 points or 0.2% and for the week lost 0.3%. The S&P 500 closed at 1,836.25, down 3.53 points or 0.2% and for the week lost 0.1%. A correction after two weeks of gains was to be expected but our view is that rallies were void of substance as economic data continues weak. The weak U.S. housing data may have been caused to some extent by the bad weather across the U.S. of late. We will have to await results after the weather situation abates. However, we remain convinced that a sharp correction in the 10-15% range is imminent and would once again strongly recommend the implementation of risk hedging strategies for holders of large equity positions.
Currencies: The March U.S. dollar index comprised of a basket of currencies closed at 80.30 on Friday, down 16 ticks as disappointing U.S. housing data weighed on prices suggesting low interest rates would continue unabated. While some members of the U.S. Fed are calling for continued reduction in its stimulus program it is unlikely the Fed will take any action and that will continue to weigh on the dollar. However, since the dollar is tied to the actions of other Central Banks, it may be in a more favorable position relative to its trading partners. For now we prefer the sidelines but with a bullish bias for the dollar.