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Financial Markets – Preview for Week Starting 18th August 2013

Major Events of Last Week

The global markets are currently experienced a torrid time by plummeting for the second consecutive week. The Dow Jones Industrial Average crashed by over 2% to register its largest weekly decline since mid-2012. The S&P 500 and NASDAQ did not fare much better by posting their biggest losses in over 2 months. The US major indices slumped again last Friday exemplified by the Dow Jones Industrial Average plunging by over 30 points; the S&P dropping by almost 6 point and the NASDAQ creeping lower by nearly 3 points.

The primary catalyst driving this extensive market correction is, without doubt, increasing speculation that the US Federal Reserve will commence trimming back its colossal stimulus support as early as next month. The Fed has continuously pumped liquidity into a fragile financial infrastructure since the 2007-2008 crash which has driven equities to record historic highs earlier this year. Recent speeches from prominent Fed committee members are now endorsing the viewpoint that the central bank considers that the time is about right for the stock markets to stand on their own feet.

Fed policies are so important to investors that any developments affecting them are completely overshadowing the news that the global economy could now be finally emerging from its doldrums. The Eurozone posted a spate of impressive data last week disclosing that its 18 month long recession could be coming to an end. Similarly, signs are developing suggesting that the Chinese economic slowdown may now be stabilizing while a British economic recovery appears to be acquiring fresh impetus.

Investors were further traumatized last Friday following the publication of weaker-than-expected US economic data and poor corporate earnings. A prominent customer sentiment survey developed and issued by Reuters and the University of Michigan disclosed a figure that had slumped from the six-year high recorded in July. On a more positive note, US housing starts increase by almost 6% during July compared to a 9.9% decline registered in June.

The markets were disturbed by a string of disappointing financial reports posted by major US retailers last week. Nordstrom issued its corporate earnings figures late last Thursday revealing that the department store had missed analysts’ expectations for its Q2 revenues. In addition, this retailer revised its full 2103 profit and sales forecasts lower. Consequently, the company witnessed its shares slump by nearly 5% last Friday. This dismal result followed on the heels of worse-than-expected figures published by Macy’s earlier during last week.

 

What to Expect This Week

Following two weeks of significant market declines, investors will attempt to locate catalysts over the coming days that will help them induce a rally. However, analysts are predicting that, in order to accomplish this task, speculators will now most likely have to turn their attention to a recovering Eurozone as opposed to the USA. Adding credence to this viewpoint is that mangers of prominent hedge funds have already started to position their portfolios towards European assets after recent signs have demonstrated that this region is emerging from its historically long recession.

This situation is a complete reversal from that experienced during the first half of 2013 when the USA stock markets easily outperformed their European counterparts. However, since then a number of disappointing corporate earnings reports, such as Cisco and Wal-Mart, have adversely impacted USA equities. In addition, increasing expectation of imminent Fed action to rein in its influential quantitative easing policies is dragging the US major indices lower.

Investors should be able to acquire deeper insights into Fed future intentions when the minutes of its July meeting are published this coming Wednesday. The USA is also scheduled to post key economic indicators this week. Existing homes sales will be issued on Wednesday followed by weekly unemployment claims and PMI on Thursday. Finally, new homes figures will be released on Friday.

This week will also be the finale of the current US corporate earnings season. Major retail corporations will post their revenue and profit figures including J.C Penny on Tuesday, Target on Wednesday and Gamestop on Thursday. DIY specialists, such as Lowe and Home Depot, are also scheduled to publish their numbers this week.

Investors will continue to speculate on the current amazing performance of Apple over the coming days. The shares of this company rocketed by over 11% last week after billionaire, Carl Icahn, advised the markets he held a larger stake in the firm’s stocks than was previously understood. Icahn also expressed the opinion that he considered Apple to be ‘undervalued’. Consequently, despite the stock markets generally plunging last week, the shares of Apple surged.

 

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