Emerging markets, battered by the prospect of capital flight as investors pulled liquidity from their economies back to the safer haven of developed country higher yields, were given a very welcome reprieve.
As we entered the end of the week the market settled down and came off their highs only to limp out on Friday as the ongoing budget brinkmanship in Washington and a possible government shutdown took center stage. In addition, it was a Quadruple Witching expiration Friday when September options expire and quarterly futures expire. On top of that, the S&P 500 was rebalanced and key components of the Dow Jones Industrial average were replaced. Nike (NKE), Visa (V), and Goldman Sachs (GS) replaced Alcoa (AA), HP (HPQ), and Bank of America (BAC).
Here's a daily chart of the S&P 500 as of the close of business on Friday:
We'll need to see ITB move higher as the Ten Year yield moves higher. That will be the indication that this economy can stand on its own without central bank intervention.
In the short term, get ready for some volatility going into October as the next chapter of the "fiscal follies" unfolds. If we can get past that relatively unscathed, the stage is set for a ferocious rally going into year end. I'm more concerned about the market going into 2014.
In the very short term, Angela Merkel will win another term as Chancellor of Germany as Germans go to the polls on Sunday, 9/22. However, the composition of the Bundestag and her coalition is tentative and depending on whether she has to reach out to opposition parties in order to create a ruling coalition may affect global markets on Monday. But this will not effect current stability in Europe.
Have a great week!