North American indices edged higher in a week shortened by Labour Day on Monday. The S&P 500 was up 0.5%. Combined with last week's 3.8% gain, the S&P 500 is up 4.2% in the last 2 weeks, and up 5.7% since September began.
The upward movement in North American indices this week was caused by more better-than-expected data from the U.S. US July exports rose 1.8%, the largest amount in 2 years. US initial jobless claims for last week also fell 27,000 to 451,000, which was lower than the 470,000 that was expected. Friday's news from China also boosted markets, in which Chinese imports in August rose 35.2% from a year earlier, which showed that consumer demand remained strong in the world's engine of growth.
Negative news from the euro zone
While better-than-expected data from the U.S. continued to emerge, news from the euro zone were far more negative this week. Germany's economy showed weakness as Germany's August exports fell 1.5%. The Irish government's decision to split Anglo Irish Bank into two companies, one containing deposits and the other with bad loans, sent Ireland's CDS to a record high.
In addition, a German banks' association warned that following the new Basel III banking regulations, the 10 largest German banks would need $105 billion euros to meet Tier 1 capital requirements. The troubling news from the euro zone sent gold to as high as $1262.35/ounce on Tuesday.
Brace for volatility ahead
Investors are using options to protect against volatility next week, as markets continue to enter what is historically the most volatile month. According to Reuters, some investors are buying the September $45 call on the VIX, indicating that they expect the volatility index to double its current level by the end of next week.
Markets will be taking direction from next week's long list of economic data, which includes retail sales on Tuesday, industrial production on Wednesday, the PPI and jobless claims on Thursday and the CPI and consumer confidence on Friday.
The trend since the beginning of September has been that data from the U.S. have beat expectations, while bad news have continued to emerge from Europe. If the economic data next week upholds this trend, then markets can be expected to be range-bound. However, if US data begins to head south, then markets can be expected to head lower, since news from Europe is likely to continue to be worrisome.