Stocks rallied to new highs this week following the Federal Reserve’s decision not to alter the wording of its statement regarding interest rates. The Fed did take a more hawkish stance in its forecast for interest rates, but the non-binding opinion was not as important as the decision to keep the wording the same, which indicates early rate hikes are not yet a concern. For the week, the S&P 500 gained 1.25 percent, while the Dow Jones Industrial Average rallied 1.72 percent. The Nasdaq’s return was much more modest, up only 0.26 percent. On the downside, the Russell 2000 lost 1.89 percent for the week.
The Fed’s somewhat more hawkish position was a concern in foreign currency markets, where already weak conditions deteriorated. Japan downgraded its economic outlook following the economy’s failure to bounce back from a sales tax hike at the start of the second quarter. Japan’s economy contracted at a 7.1 percent annualized rate in the second quarter, and the widely expected third quarter rebound is not as strong as hoped. The result was a sinking yen, though Japanese stocks continue to push higher thanks to monetary intervention.
Economic reports out of China indicated a stark decline in housing prices, with the slump hitting 68 of the 70 cities tracked by the government. This came on the heels of data showing China’s industrial production, fixed asset investment and foreign direct investment also sank in August. With no help from the U.S. Fed, the result was slumping currencies across many major resource exporters such as Brazil and Australia.
The British pound was a holdout; it saw a strong rally as fears of Scottish independence dissipated. The euro remained near its lows for the year and a nascent bounce was snuffed out by the Fed’s statement. That is the key currency to watch since it makes up almost 60 percent of the U.S. dollar index.
Third quarter earnings season is still a few weeks away, though Oracle (ORCL) and FedEx (FDX) reported over the past few days. Oracle missed estimates and co-founder and CEO Larry Ellison decided to step down. FedEx beat estimates and said volumes were strong, a positive sign for the U.S. economy.
On Thursday, China launched its international gold exchange. Foreign investors can now trade contracts denominated in renminbi in Shanghai. China is the world’s largest importer of physical gold, but the price is set by the London and New York markets that mainly trade futures contracts. All of the gold contracts in China are backed by physical gold and it is China’s goal to become the price setter for global prices. The move is also a step forward in the internationalization of the yuan.
Finally, generating far more headlines this week was the Alibaba (BABA) IPO. Shares priced at $68 and were quickly bid up by investors hoping to get a share of the Internet giant. Shares gained 38 percent, closing at $93.89. At one point during the day, the stock was up over 46 percent. This was the largest IPO in U.S. history, surpassing Visa (V) in 2008. Yahoo, a significant holder in Alibaba, fell more than 2 percent. Investors looking for exposure to Alibaba moved out of Yahoo now that direct access is available.