The Middle East is experiencing continuing turmoil as the Islamic State of Iraq and Syria, know as ISIS makes headway threatening the region. The Israeli/Hamas exchange of rockets is also a destabilizing factor in the oil rich area. The potential impact on the Western economies of this escalation in the Middle East could undermine market psychology and affect the markets we follow globally. Our individual comments will reflect our concerns.
Interest Rates: The Treasury bond (CBOT:USU14) closed at 137 13/32nds, up 10/32nds and its best week in four months. The yield on the 30-year bond declined by 2 basis points at 2.516%. For the week the decline was 11 basis points, its biggest decline since the middle of March. Asian buyers along with geopolitical turmoil prompted investor interest in the relative safety of the U.S. Treasury market. Some selling appeared as the concern over the Portuguese bank subsided. We see bonds at the high of our expected price range and would consider selling here in advance of U.S. earnings reports this week.
Stock Indices: The Dow Jones industrial average closed Friday at 16,943.81, up 28.74 points but for the week lost 0.7%. The S&P 500 closed at 1,967.57, up 2.89 points but 0.9% lower for the week. The Tech heavy Nasdaq closed at 4,415.49, up 19.29 points but for the week lost 1.6%. The ongoing geopolitical events in Easter Europe and the Middle East weighing on investor sentiment as well as concern related to the Fed Philadelphia President Charles Plosser suggesting the Federal Reserve should "consider hiking rates in response to the improving outlook". Any ideas of raising rates while the U.S. economy is still "struggling" would be, in our opinion, premature and serves no useful purpose. Dennis Lockhart, President of the Atlanta Fed said "the central bank should hold short term rates close to zero for another year". Any time there are opposing "comments" from members of the Federal Reserve, investors prefer the "wait and see" attitude. We once again strongly urge holders of large equity portfolios to consider implementing risk hedging strategies.
Currencies: The U.S. Dollar Index (NYBOT:DXU14) comprised of a basket of currencies, closed Friday at 80.235, up 6.5 points gaining against the British pound which lost 25 points to $1.7108, and the Canadian dollar 72 points to 93.01c. Canada reported a surprise employment decline in June, it'’ second month as 9,400 jobs were lost and their unemployment rate rose to 7.1% from 7%. Economists surveyed had projected an increase of 20,000 jobs no change in the unemployment rate. The September Canadian dollar lost 72 points to close at 93.01c. Europe recovered after the Thursday decline prompted by the news of a Portuguese conglomerate, Espirito Santo International S.A. missed a payment on some short term debt. The September Euro closed at $1.3612, up 5 ticks, the Swiss Franc also gained 5 ticks to $1.1214. Losses were posted for the Japanese yen 6 ticks to 9873 and the Australian dollar 4 ticks to 9348. We prefer the sidelines but continue to favor the dollar against its trading partners.
Energies: August West Texas Intermediate (NYMEX:CLQ14) crude closed at $100.83 per barrel, down $2.10 or 2% on Friday after a gain on Thursday tied to the ongoing turmoil in the Middle East region. For the week crude lost around 3.1%. Some relief came from reduced concern over Iraqi oil production as well as the Libyan production back on line. While Iraqi production declined by 260,000 barrels per day in the month according to the International Energy Agency report on Friday, supplies from Iran, Nigeria, Angola, and Saudi Arabia offset the decline and OPEC production remained steady. The report by the IEA confirmed trader belief that the crude market is not as tight as previously indicated. We prefer the sidelines but with a bearish view towards crude. August natural gas closed at $4.15 per MBTU, up nearly 3c but for the week continued under long liquidation pressure posting a 5.9% decline for the week. We continue to feel natural gas is oversold and we would add to long positions here.
Precious Metals: August gold (COMEX:GCN14) closed at $1,337.40 per ounce, down $1.80 but managed a 6th weekly gain as the concern over the failure of the Portuguese bank to make its scheduled payment was missed. We continue to prefer the sidelines since our view that the current turmoil in the Middle East would normally have given rise to increased buying of gold as a safety "hedge." September silver closed (COMEX:SIN14) Friday at $21.46 per ounce, down almost 5c but for the week managed a 1.5% gain. Once again of the two precious metals we prefer silver if only on the basis of percentage gain potential. October platinum closed at $1,513.80 per ounce, down $3.30 while September palladium gained $1.70 to close at $875.30. Platinum lost 0.4% for the week against the palladium weekly gain of 1.6%. We continue to prefer palladium against platinum.
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