Janet Yellen, current Fed vice chair, takes over as the Ben Bernanke era as Fed chief came to a close this past week. Monetary policy as stated from the last week’s FOMC meeting was largely as expected and the handover of Fed leadership appears to be smooth. Despite this, you would not know it based on market reactions to other events. Equities were volatile this past week with major indexes ending in the red for the week. International and U.S. events weighed on stocks at week’s open. Traders worried about economic slowdown in China and whether a three day sell-off in emerging markets had run its course. Investors also were concerned about the mid-week FOMC policy decision to taper an additional $10B and a drop in new home sales. The S&P 500 Index (SPX) fell 0.4% while the Dow Jones Industrial Average ($DJI) led the downside again off 1.1% for the week. The tech-heavy Nasdaq (NDX) fell 0.6%. For the year so far, the Dow Industrial have slid 5.3% and the S&P 500 (SPX) is off by 3.6%.
Volatility ended up last week relatively flat from the previous week’s gains. The back and forth action in stocks was evident in the CBOE Volatility Index (VIX) as it had some big swings. The ‘Fear Gauge’ is still near the $18 level but we would need to see it jump above the psychological $20 mark to provide any further downside concerns for equities. We should expect volatility to remain elevated if the markets continue to see risk for a further sell-off. Watch for the open of S&P 500 futures (/ES) at 5 pm CT and the Asian markets tonight for our direction to start the week.
Treasury yields fell moderately this past week. The benchmark 10-year yield finished the week at the 2.66% level as Treasuries have seen continued in-flows. Investors have steadily poured into the safety of bonds since the start of the year. Continued worries about emerging markets and on news of slowing in the Chinese manufacturing sector fed the ‘Risk-Off’ moves. Gold Futures (/GC) slid this past week after a month long rebound. Inflation data out of Europe this week showed that it continues to under-perform estimates and upcoming targets.
There is a lot on the calendar this week. After the December employment report’s disappointing 74,000 gain in payroll jobs, markets will focus on whether there is improvement when the January report posts Friday. The past week’s drop in durables orders was surprisingly sharp on a fall in the transportation component. Traders will also closely watch the PMI and ISM’s manufacturing numbers for January for possible strengthening in manufacturing on Monday. The catalysts that have driven the markets off of recent all-time highs (emerging markets, Fed taper, and lackluster earnings) are still present so we may see more volatility over the next few weeks. Let’s hope the Super bowl hangover provides continued opportunities in the option markets this upcoming week.
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