Markets Could Be in for Another Bumpy Week
Policy + Politics

Markets Could Be in for Another Bumpy Week


Be prepared for more shake, rattle and roll. Markets could be in for another bumpy week as investors adjust to higher yields and institutions shuffle portfolios ahead of the quarter's end.

The week ahead will also be a time to look forward to the second half, which many economists, and the Federal Reserve, believe will be faster growing than the first half. So every bit of data, including durable goods, new home sales and home-price data Tuesday, and jobless claims and personal income Thursday, will be important measures for markets.


Strategists expect the volatility to continue to rip across financial markets after a big move in rates forced a re-setting of asset values around the globe. The benchmark 10-year Treasury, which influences mortgages and other rates, rose above the psychologically key 2.50 percent Friday for the first time since August, 2011.

"It's a big deal when we see the 10-year move like this. A 90-basis point move in four weeks in 10-year yields is a very rare move, a very scary one," RBS macro credit strategist Edward Marrinan.

Stocks had one of the worst weeks of the year, with the S&P 500 down about 2.1 percent to 1592, its worst week since April. The Dow was off 1.8 percent at 14,799. The dollar was up about two percent against a basket of currencies, but up nearly four percent against the yen. Selling in Treasurys spread to corporates, mortgages and munis. Emerging-market currencies and stocks were hard hit. Commodities were also slammed with gold down 7 percent for the week and WTI crude down 4 percent.

"There's still plenty of uncertainty," said Marrinan. "Market participants are not clear in their heads about whether the Fed's commitment to initiate a tapering program in the near or more intermediate future is justified by the underlying performance of the economy. Whether that be momentum in the job market or inflationary pressure, neither of them seem to be supportive of an earlier tapering rather than a later one.

"However, the Fed has told us it has such confidence … and I think the volatility continues," he said. 

Rates have been rising since early May, first on signs of improving jobs data, and then after Fed Chairman Ben Bernanke May 22 told Congress that the Fed could begin to "taper" back its bond purchases sometime in the next couple of meetings.

On Wednesday, after the Fed met, he put more details around the plan and said if the economy improves enough, the Fed could begin to wind down its $85 billion in monthly purchases before the end of the year and complete the program by mid-year 2015.


The Fed also released an improved outlook for unemployment, with its range of estimates falling below 7 percent in 2014 and to 5.8 to 6.2 percent in 2015. The Fed forecasts also showed that more members see an early 2015 move to raise the target Fed funds rate, slightly ahead of what the markets had been expecting.

"To me, what is important is the trajectory of the data," said Barry Knapp, head of equity portfolio strategy at Barclays. "My inclination is to think that the Fed is correct and that the underlying private sector is improving and the economy is improving." First-quarter GDP is expected to be revised to show 2.4 percent growth when it is released Wednesday. Many economists believe the second quarter will be weaker, but the third and fourth quarter could pick up, with some estimates at 3 percent or better.

Knapp said he has changed his view on some sectors this week. "We downgraded utilities and took it from overweight to market weight, and we took our short off on consumer discretionary, taking it form underweight to market weight. We're still not all in on cyclicals, but we did reduce our exposure to stocks with bond-like characteristics," he said

Even though he is changing his view on the defensive sectors, Knapp said he still expects a shakeout in the stock market and the selling is not over. He maintains a 1525 year-end target on the S&P 500, with an upside chance of it reaching 1600. He said as it looks like the Fed is going to begin winding down its quantitative easing program, cyclical stocks could still get hit and the market in general could be negatively impacted as investors become more convinced the Fed will ease.

"I do think if the stock-market correction continues and we find ourselves down 9 percent, there will be a turning point, where if the data's good it won't be viewed as bad anymore," he said. "The duration of most of these corrections has been two to three months."

Stocks in the coming week will also march to the tune of the bond market, which in turn may also react to volatility in stocks. The quarter end could be particularly important in credit markets, because of the big adjustment in rates.

"We have an awful lot of tests next week. Even if you like the market at these levels, this is not the environment where you're going to take on new positions," said David Ader, chief Treasury strategist at CRT Capital. "The price action has been so vicious that we're going to be very responsive to the data, the Fed, the auction outcome…There is stress. People are under duress to unwind."

There is a parade of Fed speakers who will be watched for any nuance on the economy or the timing for Fed tapering that Bernanke laid out in his comments Wednesday. Even as the Fed ends its purchases, it will still hold nearly $4 trillion assets on its balance sheet, and Bernanke said that most Fed committee members expect the Fed to retain the mortgages it has been buying until they mature.

Mortgages, too, have been volatile, as have the whole spectrum of credit markets. BlackRock's Rick Rieder, co-head of fixed income, Americas, said he reduced credit risk in BlackRock's Strategic Income Opportunities Fund, a flexible fund he manages. Rieder said in an interview Thursday that he was buying shorter duration government bonds and moved to cash while the markets get through this volatile period. He now is buying some emerging-market currencies and mortgage-backed securities to pick up some yield.

"There's no doubt people are re-balancing portfolios. I do see a dynamic where we'd like to add back a lot of our credit exposure in the next couple of weeks," he said.

The selling has made some markets more appealing. He said countries like India and Australia are starting to look attractive from a rates perspective. He also said the volatility has made agency mortgages very attractive, and he has been picking up some municipal bonds.

Rieder said he believes the volatility in markets is being caused by evolving monetary policy. He said it is not just the Fed, but also the Bank of Japan which has moved into a massive easing program just as the Fed looks set to pull back. "I think for a period of time you want to be in more liquid securities and shorter duration, until we have a sense of where things are," he said. "The front end of the curve has gotten repriced too aggressively."

He said the quarter end bears watching closely. "I think we'll have a choppy few weeks. I think we're going to hit levels that will get attractive…What happens around quarter end is something you'll have to watch carefully," he said. "You'll see some redemptions."

Investment grade corporate bonds have also moved to levels where they are more attractive, said Marrinan. He said the investment grade yield is now 3.23 percent, up from 2.5 percent in April and 3.05 percent before this week's Fed meeting. "Year-to-date, total return for investment grade corporate bonds is -3.22 percent. Whereas two weeks ago, the total return was -2 to -1.75 percent," he said.

10:30 am Dallas Fed survey
12:30 pm Dallas Fed President Richard Fisher

08:30 am Durable goods
09:00 am S&P/Case-Shiller HPI
09:00 am FHFA HPI
10:00 am New home sales
10:00 am Consumer confidence
10:00 am Richmond Fed survey
01:00 pm $35 billion 2-year note auction

07:00 am Mortgage applications
08:30 am Real GDP Q1 (third)
01:00 pm $35 billion 5-year note auction

08:30 am Initial claims
08:30 am Personal income and spending
10:00 am Pending home sales
10:30 am Fed Gov. Jerome Powell
10:30 am Atlanta Fed President Dennis Lockhart
11:00 am KC Fed survey
01:00 pm $29 billion 7-year note auction

09:15 am Richmond Fed President Jeffrey Lacker
09:45 am Chicago PMI
09:55 am Consumer sentiment
12:00 pm Cleveland Fed President Sandra Pianalto
03:30 pm San Francisco Fed President John Williams

This piece originally appeared in CNBC.

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Bulls and Bears Face Off on Market's Next Move
Is the Global Market Selloff Just an Overreaction?
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