Market Drivers: China, Housing, Jobs

English: Performance of the VIX index as a vol...

English: Performance of the VIX index as a volatility predictor (Photo credit: Wikipedia)

Volatility is once again creeping back in to the marketplace, with both overseas and domestic policy concerns keeping the market on edge. Economic data has been mixed, which has kept traders guessing what the Fed will do regarding the current stimulus measures. Here are three things that have been driving the market this week.

Liquidity Concerns in China

The week kicked off with sharp selling pressure that stemmed from rising interest rates and potential liquidity issues in China. Over the last two weeks the Peoples Bank of China has refrained from injecting capital into the system, taking a hardline stance and admonishing banks “to do a better job of cash management.” As a result, funds have been in short supply, the rate Chinese banks charge to borrow from each other has surged, and fears of a credit crunch are front and center. The Chinese government helped ease concerns on Tuesday offering to support the banks, adding “it had already offered funds to financial institutions and would continue to do so," however they gave no details. So while the larger worries still remain, they have subsided for the moment.

Rising Home Prices

Boosted by both increasing demand, decreasing inventory, and a sense of urgency among potential buyers, home prices are on the rise. According to S&P Case-Shiller home price index released on Tuesday, home prices jumped 12.1% year-over-year in April, beating expectations for a 10.6% increase. Apparently the recent rise in mortgage rates has given incentive to homebuyers to purchase homes, with new home sales climbing 2.1% % month-over-month to an annualized rate of 476,000 beating estimates looking for 460,000 units. In a separate release, the Mortgage Bankers Association purchase applications index rose 2.0 percent in the June 21 week for a year-on-year gain of 16 percent. This index measures applications at mortgage lenders, and is a leading indicator for single-family home sales and housing construction.

Employment Data

Markets reacted favorably to this week’s employment numbers. The latest weekly initial jobless claims totaled 346,000, slightly above the expected 345,000 that had been expected. As for continuing claims, they fell to 2.965 million from 2.966 million.  While the data was relatively uninspiring, traders took the “in-line” reports as a positive when viewed in light of continuing stimulus from the Fed. In essence, as long as estimates stay pretty close to where the actual’s come in, there is a good chance the federal government will be reluctant to “taper” their QE measures in the near future.

Weekly Bonus:

Over the last 18 trading sessions, 14 have had 100+ point swings in the DJIA. During that time we have seen the VIX (volatility index) rally from the 13 level up to the 20’s earlier this week. Could it be that volatility has returned for the summer? Or will we settle back to the low VIX, tight trading ranges we had  throughout May?

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