Weekly Financial Market Recap and Outlook

by Jeffrey Friedman

We’ll see what the Federal Reserve has to say about the economy and interest rates at the end of their policy meeting Wednesday, June 25, but let’s take a look at price action in the financial markets in the meantime.

Economic data has pointed to further declines in housing and in manufacturing, and inflation is heating up at the wholesale level. The economy more and more appears headed for stagflation. Forecasts for economic growth later this year have been downgraded, and the latest housing and manufacturing numbers support those views. Headline inflation continues to heat up, and Fed officials have to be worried that it may start seeping into core inflation. Treasury interest rates eased somewhat last week despite higher inflation fears, as flight-to-quality over credit market concerns fueled a mild rally in Treasury prices. Renewed worries about banking stocks also contributed to the U.S. dollar’s woes last week. With the re-emergence of financial concerns, some analysts questioned the ability of the Fed to raise interest rates anytime soon.

Stocks and Stock Indexes

Stocks fell sharply last week – especially the blue chips. Key factors included a lack of progress in getting crude oil prices down, losses in the financial sector on the heels of  earnings downgrades, a larger-than-expected jump in the producer price index, and bearish reports on housing starts and industrial production. A fuel-related loss for the latest quarter at FedEx also weighed on the markets, as the shipping firm is seen as a bellwether for the economy. We also had added volatility tied to the “quadruple-witching”expiration of June stock index futures, stock index options, stock options, and single stock futures (SSF) on Friday, June 20.  

Year-to-date, major indexes are down from year end as follows: the Dow Jones Industrial Average, down 10.7 percent; the S&P 500, down 10.2 percent; the Nasdaq, down 9.3 percent; and the Russell 2000, down 5.3 percent.

Turning to futures action, the September S&P 500 index closed sharply lower on Friday,  falling below the 62 percent retracement level of the March-May rally at 1325 as it extended the week’s decline. Momentum indicators, the Stochastics and the Relative Strength Index (RSI), are oversold but remain bearish, signaling that sideways to lower prices are possible near- term. If September extends last week’s decline, the 75 percent retracement level of the March-May rally at 1279 is what I see as the next downside target. Closes above the 20-day moving average at 1368 are needed to suggest that a short-term low has been posted. For day traders, I see the market force as neutral to bullish. Watch for support above the 1315 - 1319 zone, and for prices to start to move higher today.

Crude Oil

Crude oil futures once again had sharp swings last week, but front-month crude oil futures ended the week down by just pennies. Nonetheless, the sharp swing back up at the end of the week weighed heavily on stocks. The week’s wild ride started Monday, June 16, as intra-day trading hit a new record high just under $140 per barrel but then slid over $6 to end the day down, at $133.96 due to profit taking. After little change on Tuesday, prices jumped over $2 per barrel on a drop in U.S. inventories and on news that Nigerian oil workers are threatening to strike. But the biggest move of the week was Thursday’s nearly $4 per barrel drop to $132.18 after an announcement by China that it would be raising gasoline and diesel prices, which will reduce demand. Prices turned back up on Friday after reports that Israel had conducted military exercises earlier in the month that might be related to a potential attack on Iranian nuclear facilities. Concern over a labor strike by Nigerian oil workers also lifted prices. This morning, crude oil is again on the rise, despite a pledge from Saudi Arabia to increase production by some 200,000 barels a day.

Grains

Corn and soybean prices have soared due to Midwest flooding that swallowed crops (which are about to give consumers more grief at the grocery store). In the latest bout of food inflation, beef, pork, poultry and even eggs, cheese and milk are expected to get more expensive as livestock owners go out of business or are forced to slaughter more cattle, hogs, turkeys and chickens to cope with rocketing costs for corn-based animal feed.

The floods engulfed an estimated 2 million or more acres of corn and soybean fields in Iowa, Indiana, Illinois and other key growing states, sending world grain prices skyward on fears of a substantially smaller corn crop. We’ll see what the weather forecasts bring this week, and upcoming reports on the state of the crop in the aftermath of floods. As we kick off the week, grains are seeing a healthy correction—but during growing season, remember prices can be volatile.

Good luck and good trading!

Financial Fundamental Reports:  Week of June 23 – June 27, 2008

Date	CT	Release	For			Consensus	Prior
Jun 24	09:00	Consumer Confidence	Jun			57.0	57.2
Jun 25	07:30	Durable Orders	May			0.02%	-0.5%
Jun 25	09:00	New Home Sales	May			515K	526K
Jun 25	09:30	Crude Inventories	06/21			NA	-1242K
Jun 25	13:15	FOMC Policy Statement
Jun 26	07:30	Chain Deflator-Final	Q1			2.6%	2.6%
Jun 26	07:30	GDP-Final	Q1			1.0%	0.9%
Jun 26	07:30	Initial Claims	06/21			NA	381K
Jun 26	09:00	Existing Home Sales	May			4.96M	4.89M
Jun 27	07:30	Personal Income	May			0.4%	0.2%
Jun 27	07:30	Personal Spending	May			0.7%	0.2%
Jun 27	07:30	PCE Core Inflation	May			0.2%	0.1%

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.

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