Week Ahead: S&P 500 Extends Losses, Oil Awaits Inventory Numbers

 | Aug 20, 2017 08:30AM ET

by Pinchas Cohen

The Week That Was

h2 Uncertainty is the Name of the Game/h2 h3 US Fiscal Policy/h3

Last week was dominated by politics, from the attempt to recuperate from the North Korea tensions, Charlottesville, and terror in Europe.

The S&P 500 extended a second-week of losses at 2.07-percent, its worst two-day fall since February 2016. It appears that even after seven months of no cohesive agenda, investors are still holding onto to the notion of reflation under President Donald Trump. The market narrative attributes most of last week’s losses to a reduced likelihood of Trump executing his agenda after receiving backlash to his Charlottesville moral equivalency statement.

h3 Monetary Policy/h3

The FOMC minutes from the July meeting revealed key topics among the policy makers: is the inflation impotency temporary or a long-term problem, and what are the implications for the interest rate path? The end result is that the Fed raised rates twice this year, with a possible third on the way. That doesn’t change the economic trajectory.

Investors are keenly aware that any uncertainty expressed by the Fed will compound political hesitation.

h3 Broad-Base Expansion In The EU, But Monetary Policy Uncertain/h3

While economic data has been strengthening in Europe, confirming repeated reports of the non-US market’s advantages—economically, politically and from a valuation perspective—ambiguity across the EU is creating significant potential for market volatility.

The European growth rate is catching up with the US at almost 2.5 percent. Germany was not the only country pushing Europe’s growth; rather, it was joined by the Netherlands and even Italy—after recovering from the verge of a banking crisis. This broad-base expansion provides a more reliable trajectory of further expansion for the Eurozone.

The downside to the region’s biggest expansion since the Great Recession is the rising euro. First, it makes exports less competitive, which may hurt European companies. Second, the ECB minutes revealed the European policymakers are wrestling with the same question, how would the rising EUR impact the ECB path of interest rate hikes?

h2 The Week Ahead/h2

All Times in EDT

Monday

8:30: US - Chicago Fed National Activity Index (July): expected to remain unchanged at 0.1. Markets to watch: S&P 500, Dow Jones Industrial Average, NASDAQ, USD crosses.