Light volumes and little economic news produced another tight trading range in European equities. Shares gained marginally on comments from China’s Premier said that easing inflation leaves more room for monetary stimulus. European CPI was reported in line with expectations at -0.5% M/M and + 2.4% Y/Y. Spain is reported to be requesting an emergency disbursement from the EU for a bank bailout.
In the US initial jobless claims were up to 366K versus 365K expected. Last week’s numbers were revised to 364K from 361K. Housing starts in July were down modestly after a strong increase in June, coming in at 746K (-1.1 M/M) and near expectations for 750K. Building permits increased by 6.8% M/M to 760K, beating estimates. This news has US equities set to open at the highs of the week and the top of the market’s recent consolidation.
With trading volumes at yearly lows due to summer vacations and traders waiting eagerly to hear more from Central bankers about stimulus, we would not be surprised if the market continued to trade in a choppy range or slowly grind higher for the rest of August. Next Wednesday FOMC minutes will be released and on August 31st Bernanke will speak from Jackson Hole. These events will give the market better insight into the Fed’s plans and is could be a catalyst for the market to break out of its range. At the moment we recommend using the buy-write strategy (selling a call against a long stock position) to reduce downside risk while maintaining profit potential if the market remains flat or increases modestly.