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Low Volume Trading Day Driven by European Weakness


Today's financial recap and tomorrow's financial outlook.

US stocks failed to break out to new marginal highs today and small caps in particular showed glaring weakness. The Russell 2000 (RUT) underperformed the S&P 500 (SPX) by 0.55% after adjusting for beta. Energy and tech stocks were the two groups that underperformed the most. Trading volume on the NYSE was the lowest non-holiday session of the year with only 4.89 billion shares changing hands. On the positive side, high yield bonds, which had been the culprit for the latest equity selloff, performed strongly for a second straight day.

The early equity weakness was attributed to a sizable decline in German professional investors sentiment on the current and future economic situation. The survey, conducted by ZEW, posted its largest drop since August 2011 when the European sovereign debt crisis peaked. The drop was almost certainly due to the renewed tensions between the EU and Russia, which has caused both to increase economic sanctions. The weakness in the German DAX was the most noticeable, and led US stocks lower much of the day.

A late day article from Reuters discussing Fed Chair Janet Yellen's hesitancy to raise rates for fear of dislocating capital markets and slowing economic growth caused US stocks to bounce back slightly. The position echoed comments from Vice Chair Fischer yesterday, that Fed officials are not overly impressed by recent economic growth and see a significant amount of slack in the labor market. Because the recovery the past five years has been subpar, the central bank would rather see inflation run above its 2% target in order to see wage growth dramatically increase and help make up for the consistent shortfall.

Tomorrow's Financial Outlook

Tomorrow morning, advance US retail sales for July will be reported. Economists expect sales to rise by 0.2% after rising a similar amount in June. After excluding auto sales, which fell for the month, core sales are expected to rise 0.4%. The retail sales report is now causes the third largest amount of volatility in fixed income markets on a given month, so it should not be ignored. Also scheduled to be reported is June private inventories. The Treasury will also sell $24 billion of new 10-year notes.

Overnight, the most significant catalyst for risk assets is the preliminary second quarter report of Japan's GDP. Most market participants are concerned that the sales tax increase in the middle of the quarter caused a significant slowdown in growth, and estimates of -1.8% QoQ reflect that. The other report of note overnight is China's July retail sales, industrial production, and fixed asset investment.

Only eight major US companies are scheduled to report earnings tomorrow, but most of them are significant. Notables include Deere (DE), SeaWorld (SEAS), Macy's (M), NetApp (NTAP), and Cisco (CSCO).

Twitter: @Minyanville

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No positions in stocks mentioned.

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