ISIS, Walmart and junk bonds: What to watch next week

Yahoo Finance

The Dow spent Friday making a comeback from losses earlier in the week. While hardly a rally, the positive ending follows two weeks of losses as the average struggles to stay positive for the year.

What happens next is largely dependent on events overseas. Uncertainty looms everywhere from Iraq and the Gaza Strip to Ukraine.

“You should keep one eye on the BBC or CNN or whatever your favorite source is for international news over the weekend,” said Yahoo Finance Editor-in-Chief Aaron Task.

Late Thursday, President Obama authorized limited airstrikes on the militant group ISIS (Islamic State of Iraq and Syria).

“We don’t know how ISIS is going to respond. That is an organization that’s been underestimated from the get go.”

City after Iraqi city has fallen to the militant group, with current battles taking place in Iraq’s Kurdish north – which has its own semi-autonomous government, and has long been recognized as the most stable area of the war-torn country.

And it’s not just the Middle East. Task is watching Ukraine as well.

“Vladimir Putin finds himself backed into a corner right now, and he’s done it to himself,” Task said, referring to Vladimir Putin’s recent decision to sanction Russian imports of meat, dairy and produce from the European Union, U.S., Canada and Australia.

Russia is moving in response to sanctions from Western nations, but the consequences may be complex. “That’s going to hurt his own people, which is going to hurt his popularity,” Task said. “He might feel like he has to do something to try to assert himself, to be bolder when it comes to Ukraine.”

Walmart & retail sales

If that weren’t enough uncertainty for global markets, don’t forget the American consumer. New data next week will give investors a read on whether or not retailers are still getting by on the “pent-up demand” we’ve been talking about since winter thawed.

Retail sales numbers are due out before the bell on Wednesday, and per Yahoo Finance columnist Rick Newman, they could be telling.

“There are some signs that maybe pent up demand isn’t as strong as we think,” he said. “Or maybe… the demand is there, but the money is not.”

Wage growth has been stagnant in 2014, with earnings ticking up just one penny in July, according to the Labor Department.

No company has seen consumers pinch pennies more than Walmart. (They report Thursday before the bell.)

“[Walmart has] actually been losing customers to dollar stores,” points out Newman. “People are looking for even cheaper places to shop than Walmart.”

Watch for falling junk

If those indicators are too mainstream for your portfolio, Yahoo Finance Senior Columnist Michael Santoli says watch junk bonds.

This past week $11 billion dollars flowed out of retail and institutional junk bond funds - the largest dollar outflow ever.

The last time we saw this type of heavy outflow was near the end of the nasty stock-market sell off in mid 2011. “This is more a lagging than a leading indicator,” said Santoli. “You don’t dismiss it though, because the high yield market really has to settle down in order for the broader risk markets, including stocks, to perform well.”

“This is obviously a key gauge of risk appetite,” Santoli said. “It’s been really the north star for the stock market for five years.”

If you want to know whether demand will flow back – keep an eye on junk-bond yields. If yields should rise a bit more they’ll hit 6%. “We’re still below that on the index level,” he said. “That could really be the test of whether demand is going to flow back in…. especially when you don’t see a lot of defaults on the horizon.” 

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