Financial Crisis Repeat?

Markets were little changed last week. Much like the month of September, the lack of change for the week did not reflect the actual activity.

The main drivers of volatility last week were Oil, the potential of a government closure, and the fear of a contagion event should Duetsche Bank fail… The S&P 500 increased a whopping .2%[1] across the week. In contrast the VIX index, which measures volatility, increased to 13.9 from a meager 12.3[2].

OPEC has thrown around the idea of reducing output for about a year, never to deliver on an agreement. Last year Saudi agreed to a freeze when it was at an all-time high in production. That does little to balance out the supply and demand curve. In a surprising action OPEC came to an agreement last week to REDUCE production! Speculation has the reduction projected at 500K to 750K barrels per day[3]. The news moved West Texas Intermediate crude to 48.11 by weeks’ end. The increase, along with other factors, made energy the top performing S&P 500 sector year to date.

Also helping oil across the week was currency movements. As banking concerns in Europe dissipated late in the week the € strengthened against the $, sending oil prices higher.

Government Shutdown
The government was at threat of a shut down last week, but few were aware of it. Very little attention was paid to it as many expected an agreement to be reached. Neither party wants to be blamed for a shutdown weeks before an election. Nothing makes this more obvious than the fact that it was only temporarily funded through December 9th… As though there was not enough drama set up for December with the Federal Reserve meeting… It would not be a ‘Weekly Market Thoughts’ if I did not mention the Fed…

European Financial Crisis?
Early in the week Duetsche Bank was causing heavy turmoil in European Markets as they are facing a $15.4 Billion fine from the US. This is for their involvement in the mortgage backed securities market that brought about the financial crisis several years ago. Fear spread quickly that the fine would deplete reserves for the bank and potentially cause the next Lehman Brothers event…

As the week progressed it came out that negotiations were under way that could lower the liability to somewhere around $5 Billion. While still massive, the fine would not cause the fall of Duetsche Bank. Markets reversed course on the news. The crisis is not averted, however. Negotiations are underway and the final settlement is still yet to be determined.


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[1] www.jpmorganfunds.com – weekly market recap

[2] www.mfs.com – week in review

[3] www.mfs.com – week in review