The Week In Review



A plunging Turkish lira sent shock waves through global equity markets on Friday, causing concerns over the financial health of lenders with heavy exposure to the economically-struggling country. The S&P 500 lost 0.7%, dropping into the red for the week (-0.3%), and the Nasdaq (-0.7%) and the Dow (-0.8%) suffered similar declines.

The lira was down nearly 16% against the U.S. dollar at Wall Street's closing bell, weighed down by continued tensions between the U.S. and Turkey, which made no progress during talks this week regarding the detainment of American pastor Andrew Brunson, who is accused of supporting a group blamed for an attempted coup in 2016.

Trying to stop the bleeding, Turkey's president, Recep Tayyip Erdogan, encouraged citizens to convert their holdings of gold and foreign currencies into lira on Friday morning. However, President Trump swiftly responded by turning up the pressure, announcing that he's authorized a doubling of tariffs on Turkish steel and aluminum.

Stock markets in Europe and Asia ended Friday with sizable losses, although China's tariff-ridden Shanghai Composite finished flat. Investors in the U.S. flocked to the Treasury market, sending yields lower across the curve. The benchmark 10-yr yield, for instance, dropped eight basis points to 2.86%, a fresh three-week low.

The drop in yields -- and, more specifically, the flattening of the yield curve -- weighed on the financial sector (-1.2%), which finished with materials (-1.4%) at the bottom of the sector standings. 10 of 11 sectors finished in the red, with energy (+0.3%) being the lone exception, helped by a 1.3% rise in WTI crude futures ($67.67/bbl).

Within the tech space (-0.8%), chipmakers were particularly weak with Intel (INTC 48.85, -1.29) losing 2.6% after being downgraded to 'Sell' from 'Neutral' at Goldman, and Microchip (MCHP 87.41, -10.67) tumbling 10.9% after issuing disappointing revenue guidance. The PHLX Semiconductor Index declined by 2.5%.

Friday's batch of corporate earnings -- which also included results released Thursday evening -- was the last heavy batch of the Q2 earnings season. In addition to Microchip, Dropbox (DBX 31.05, -3.38) declined after reporting its results, losing 9.8%, but both Planet Fitness (PLNT 51.94, +3.15) and (OSTK 41.65, +3.05) rallied, adding 6.5% and 7.9%, respectively.

Looking ahead, next week's earnings lineup is retail-heavy with Walmart (WMT 90.18, +1.17), Home Depot (HD 196.30, -1.78), Macy's (M 39.97, -0.59), Nordstrom (JWN 52.58, +0.03), J.C. Penney (JCP 2.42, -0.01), Advance Auto (AAP 146.35, -1.44), and Dillard's (DDS 85.83, -2.34) all on the docket.

Reviewing Friday's economic data, which included the Consumer Price Index for July and the July Treasury Budget:

  • Total CPI increased 0.2% ( consensus +0.2%) in July, and core CPI, which excludes food and energy, also rose 0.2% ( consensus +0.2%). On a year-over-year basis, total CPI is up 2.9% (vs +2.9% in June) and core CPI is up 2.4% (vs +2.3% in June).
    • The key takeaway from the report is that consumer inflation trends are running above the Federal Reserve's longer-run inflation target, which will keep the Federal Reserve inclined to raise the target range for the fed funds rate.
  • The Treasury Budget for July showed a deficit of $76.9 billion versus a deficit of $42.9 billion for July 2017.
    • The Treasury Budget data is not seasonally adjusted, so the July deficit cannot be compared to the $74.9 billion deficit registered in June.

Investors will not receive any economic data on Monday.

  • Nasdaq Composite +13.6% YTD
  • Russell 2000 +9.9% YTD
  • S&P 500 +6.0% YTD
  • Dow Jones Industrial Average +2.4% YTD

Week In Review: Rattled by the Lira

The S&P 500 started the week on a positive note, extending last week's winning streak and coming within 0.5% of its January 26 record high. However, the index struggled in the back half of the week, especially on Friday amid a sharp drop in the Turkish lira, eventually settling with a weekly loss of 0.3% -- its first weekly loss since late June.

As for the other major averages, their performances were mixed, with the tech-heavy Nasdaq climbing 0.4% and the blue-chip Dow dropping 0.6%.

Eight of eleven S&P sectors declined this week, with industrials (-1.0%), materials (-0.9%), consumer staples (-1.9%), and real estate (-1.9%) leading the retreat. On the flip side, consumer discretionary (+0.8%), information technology (+0.3%), and telecom services (+0.7%) were the three advancing groups.

In corporate news, Tesla (TSLA) rallied on Tuesday after CEO Elon Musk tweeted that he's considering taking the company private for $420/share and has already secured funding to do so. However, shares gave back nearly all of those gains following headlines that the SEC is investigating whether Mr. Musk's funding claim is truthful.

Meanwhile, on the earnings front, Dow component Walt Disney (DIS) slid 2.2% on Wednesday after missing quarterly earnings estimates, and Snap (SNAP) tumbled 6.8% during the same session after its better-than-expected results were overshadowed by a decline in daily active users (DAUs). This week's wave of Q2 reports was the last big wave of the Q2 earnings season.

The week was light in terms of economic data, but investors did receive some influential readings on inflation. The July Consumer Price Index and the July core Consumer Price Index, which excludes the volatile categories of food and energy, came in as expected, both showing month-over-month increases of 0.2%. On a year-over-year basis, total CPI is up 2.9% and core CPI is up 2.4%.

In short, the report showed that consumer inflation trends are running above the Fed's longer-run target, providing further support for additional rate hikes this year.

The Turkish lira took center stage on Friday, dropping more than 15% against the U.S. dollar. That drop, which comes after the U.S. and Turkey failed to reach an agreement regarding the release of American pastor Andrew Brunson, created concerns over the financial health of banks with heavy exposure to economically-struggling Turkey.

Out of desperation to stabilize the currency, Turkey's president, Recep Tayyip Erdogan, asked citizens to convert their holdings of gold and foreign currencies, especially the U.S. dollar, into lira. U.S. President Donald Trump responded by increasing economic pressure, doubling tariffs on steel and aluminum imports from Turkey.

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