US equity markets recovered some ground this week and the Shanghai Composite appeared to stabilize after another round of government pledges. The DJIA is looking a little shaky, weighed on by pain in the commodities related industrials, but the S&P500 is within sight of the recent all-time highs, notching a 1.2% gain on the week. Despite pledging hundreds of billions to prop up its market, China’s stocks sunk another 8.5% on Monday – the biggest one-day drop since 2007 – drawing another promise from the China Securities Finance Corporation(CSFC) to boost its stock purchases. The FOMC statement kept expectations of a September rate hike alive without pre-committing, while Thursday’s upward revisions to past core PCE readings and a hotter than expect initial Q2 core PCE print only supported that notion. Short term US Treasury yields backed up to levels not seen since early June as traders rotated into the US long bond, likely on the belief that rates can only rise very gradually under the current subdued growth outlook. The US Q2 employment cost index threw markets a bit of a curve ball on Friday, unwinding some of the week’s earlier bets the Fed was on the precipice of raising rates for the first time since 2006. The prospect of a Puerto Rico bond default over the weekend also dampened sentiment.

The semantic tweaks made to the FOMC statement released on Wednesday did not include any overt signals that rate hikes were imminent. However, Fed watchers characterized several minor changes as a hint that Fed officials see the economy closer than ever to full employment. For several meetings, the language talked about the need to see “additional” improvement in the labor market, but this was changed to “some” additional improvement. A related section stated that slack in the labor market had diminished, striking an earlier qualification that slack had diminished “somewhat.” On the inflation front, the statement dropped reference to “stabilized” energy prices, given that oil prices are retesting their spring lows, and it retained language that said inflation is running below the Fed’s 2% objective. The next FOMC meeting is scheduled for September 16-17.

The slowdown seen in the US Q2 employment cost index (ECI) had a broad impact on markets on Friday and made some question the viability of a September Fed rate hike. The report indicated that labor costs decelerated sharply in the quarter (+0.2% v +0.6%e), reversing Q1’s +0.7% figure and delivering the lowest rate of growth in 30 years. The Q1 reading suggested wage growth had picked up perceptibly from the stagnant trend of earlier years, holding out the hope for accelerating inflation and spending, with obvious implications for monetary policy. Analysts noted that some of the slowdown could be a reversal of a seasonal effect: the uptick in the first Q1 was concentrated in incentive-pay occupations, where bonuses and commissions can be volatile, and this pop reversed itself in the second quarter. Analysts caution that the adjusted data also rose in Q1 and decelerated in Q2. Commenting after the ECI release, Fed hawk Bullard said he was not concerned by the data, and that a September rate hike can’t be ruled out.

The first reading of Q2 US GDP was just fine, with the headline figure of +2.3% a hair below expectations but much better than the revised final Q1 figure of +0.6% (which itself was revised up from the -0.2% final report in June). Personal consumption beat expectations at +2.9%, while the export figure grew to +5.3% from -5.9% in the final Q1 report. Friday’s GDP report was the first to include new methodology meant to correct the tendency to slightly underestimate growth in Q1 and overestimate growth in Q3, due to issues in measuring military spending and consumer services. Under the new approach, the government has found that the US economy grew somewhat slower in 2012-14, at an average of +2.0% a year instead of +2.3%. The slowest recovery since the end of World War II is now even weaker than previously believed.

US consumer confidence was rattled by the Chinese slump and the Greek crisis in July, as the month’s reading fell to the lowest level since last September and widely missed expectations (90.9 v 100e). Current conditions was still looking relatively healthy at 107.4, but the outlook for next six months dropped sharply to 79.9 this month from 92.8 in June.

Fed rate policy deliberations drove USD-related currency trading. The weakening dollar trend seen last week peaked on Monday as EUR/USD touched 1.1130 and USD/JPY retested 123, but the steady tone in the FOMC release and firming expectations for a September rate hike helped EUR/USD dip back below 1.0900 and the USD/JPY test seven-week highs above 124.56 on Thursday. On Friday, the ECI report threw a wet blanket on the notion of a September rate hike, pushing EUR/USD to test toward the week’s high of 1.1130 and USD/JPY back below 124. Meanwhile, the commodity crash continued without respite: WTI crude wallowed at four-month lows around $48 and Brent sank to fresh six-month lows below $53. One-year lows were seen in gold, copper and certain softs, as well as the commodity-related Aussie and Canadian currencies.

Just when markets considered Greece fixed for now, there were rumblings of a new political crisis in Athens. Press reports suggest that EU officials are pressing the government to agree to more measures than were included in the preliminary package earlier this month, prompting pushback from PM Tsipras. He has scheduled a Syriza party summit in September to discuss the bailout with party rebels and is threatening snap elections if future votes on the bailout go against the government. Separately, the government said the Athens Stock Exchange would reopen for trading next Monday after a five-week shutdown.

The impact of falling oil prices on the energy industry emerged as a major theme as a barrage of S&P500 companies reported this week. Oil majors like Chevron and Exxon reported painful results, while pure play refiners capitalized on low input costs. Exxon’s profits fell by 50% y/y while Chevron’s slump was even more pronounced given a host of one-time charges. Surging profits at the majors’ downstream operations, which benefit from lower crude prices, did not make up for the collapse in upstream operations from the slump in prices. ConocoPhillips managed to top greatly diminished expectations. Both Exxon and Chevron maintained their capex budgets unchanged, but Exxon also said it is seeing a “downward vector” on the capex figure, while Chevron said if current oil prices persist, capex would fall in 2016 and 2017. Conoco further trimmed its own FY15 capex budget. Refiner Valero roundly beat both earnings and revenue targets, with solid gains seen in operating income as cheaper crude doubled the firm’s margins. Occidental Petroleum missed revenue expectations as total sales fell more than 30% y/y.

Social media names Facebook and Twitter were both punished for missing consensus user growth targets. Both firms exceeded revenue and earnings targets: Facebook’s revenue gained about 40% y/y and Twitter’s surged 63% y/y. Traders ignored the massive revenue growth and zoomed in on FB’s lower-than-expected 17% y/y growth in daily active users and TWTR’s subpar 12% y/y growth in monthly active users.

Allergan reached a deal to sell off its generics unit to Teva for $40 billion in cash and stock. The deal is divided between $33.8 billion in cash and approximately $6.8 billion of Teva’s shares, giving Allergan a nearly 10% stake in Teva. With the Allergan transaction, Teva also withdrew its spurned, unsolicited $37 billion offer to acquire Mylan, clearing the field for Mylan’s effort to woo Perrigo. In other merger news, Belgian chemical group Solvay agreed to buy Cytecfor $5.5 billion, giving it a bigger presence in the US lightweight materials business. Coca-Cola Enterprises stock was up double digit percentages on Friday after a report that it could combine its operations with other bottlers in Spain and Germany.

On Monday, Chinese stocks experienced their worst one day rout in eight years, falling 8.5% on jitters about the government withdrawing some of its recent measures to prop up the market. The fear was exacerbated by the unexpected y/y decline in June industrial profits data. In response to spooked investors, officials insisted that they had not withdrawn from the stock market and that they would continue efforts to stabilize sentiment. The PBoC conducted another CNY20B in open market operation liquidity injections for the week, while government reform efforts aimed at slowing the build-up of leverage in the financial system contributed to total margin debt falling to its lowest levels since March. Nonetheless, the Shanghai Composite broke a string of 3 weeks of gains with a 10% decline.

Did you know Cannon offers FOREX trading including the MT4 platform?Check out our Trading Systems/ALGO Trading and Managed Accounts section!