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Proprietary Trading Weekly Market Recap For Friday, June 13, 2014

Stocks Close Lower and Break Three Week Winning Streak as Mid-east Tensions Erupt

U.S. equities experienced a defensive week as stocks were under pressure mid-week as escalating oil prices and instability in Iraq are discounted into future earnings growth. NYMEX crude topped $107 bbl in early trade, and is a salient reminder of the risk of the oil-based economy, as usual coming just ahead of peak summer usage. U.S. Secretary of State Kerry said he expected "timely decisions" from Obama on the Iraq situation. Retail Sales came in slightly worse than expected while PPI posted negative prints for both headline and core prices in May, curiously just ahead of next week's Fed meeting. For the week the S&P 500 index declined 0.68%.

Crude Oil

NYMEX topped $107 per barrel, with events in Iraq driving prices higher. Government forces in Baghdad are reportedly being helped by Iranian Special Forces to defend against insurgents, which are advancing toward the city. Officials have asked for U.S. airstrikes to hold off the advance, which so far have been denied. There have been no oil production/export delays from the south of Iraq to date, where most of Iraqi oil emanates. Oil fields in the North however, are now under Kurd control.

Central Bank News

The Bank of Englands Carney delivered an unexpected hawkish message at the keynote Mansion House speech Thursday. He said that interest rates "could rise sooner than markets currently expect," and that the housing market was now "the greatest risk to the domestic economy." This will invite markets to re-price a 25 basis points hike before year-end. Carney's comments also chime with recent remarks by his MPC colleague, Weale, who has argued that small, incremental rate rises would be better started sooner rather than later if potentially disrupting bigger and more sudden tightening's were to be avoided further down the road. Stocks did not react kindly to the increase in rate expectations.

ECB deposits plunge in tandem with interbank rates as the negative deposit rate takes effect. Germany's Commerzbank already announced that it will no longer deposit surplus cash at the ECB and with banks looking elsewhere to park funds, interbank rates have dropped sharply. The move is designed to boost interbank lending, but could backfire if banks pass on the higher costs to costumers instead, which remains to be seen.

US Economic News

U.S. retail sales rose only 0.3% in May, and were up 0.1% excluding autos. The 0.1% April headline gain was boosted to 0.5%, and the flat ex-auto reading was revised to 0.4%. Sales excluding autos, gas, and building materials dipped 0.1%. Vehicle sales climbed another 1.4% after solid gains since February.

U.S. PPI final demand slid 0.2% in May with the core rate dipping 0.1%, weaker than expected. There was no revision to the 0.6% headline gain in April, or to the 0.5% ex-food and energy component. The Fed doves can use such data to underpin their arguments for continued policy stimulus.