Europe worries send stocks lower, bonds higher

U. S. stocks were higher for about the first hour of trading on Thursday but it was mostly downhill after that, with the major equity indexes closing down about 0.5% across the board.

It was mainly a risk-off trading day, with investors driving up the price of U.S. Treasury securities and defensive equity sectors like utilities. Just two sectors of the S&P 500 gained ground, led by a 1.1% advance in utilities (industrials rose a scant 0.1%). Likewise, the Dow Jones Utilities Average outperformed on Thursday, gaining 0.9%. In the bond market, the price of the 10-year Treasury note rose ½ point to lower its yield six basis points to 2.41%, its lowest closing level in more than a year (the note hit 2.40% back in May during the day).

Most of Thursday’s focus was on Europe, where the news was not especially positive, as the European Central Bank met and Russia announced a ban on food imports from the West in retaliation for sanctions against Moscow. ECB President Mario Draghi warned that geopolitical risks “have the potential to affect economic conditions negatively,” particularly in the euro zone. Speaking at his regular press conference after the ECB meeting – at which it left interest rates unchanged and announced no new initiatives to try to jumpstart the economy – Draghi noted that “there has been a slowing down of growth momentum” in the zone, citing recent economic data. Earlier this week, Italy announced it was in recession, while recent German economic reports have been weakening, including Thursday’s report that industrial output expanded in June less than forecast.

European stocks, which had been higher earlier in the session, dropped sharply after Draghi’s comments. The Stoxx Europe 600 fell 0.7% to its lowest level in nearly three months, while the main German, French and Spanish stock indexes fell 1% or more and Italy dropped nearly 2%. In sovereign bond trading, the yield on the 10-year German bund fell four basis points to a new record low of 1.06% while the two-year yield fell below zero. The euro fell to its lowest level against the dollar since last September.

Asian shares were mostly lower except in Japan, where the Nikkei 225 ended a five-day losing streak. The index rose 0.5%. Elsewhere, however, the Shanghai composite dropped 1.3%, its biggest decline since June 19, while Hong Kong’s Hang Seng index fell 0.8%. India’s Sensex and Korea’s KOSPI indexes both lost 0.3%.

U. S. unemployment claims continued their downtrend. New claims totaled 289,000 last week, down from 303,000 the prior week and below the consensus forecast. The four-week moving average fell to 293,500, a recovery low.

The Federal Reserve Thursday released a new report that shows many Americans have yet to recover from the great recession. While the findings of the 100-page Report on the Economic Well-Being of U.S. Households are nearly a year old – the survey was conducted last September – they do show some unsettling things about U.S. consumers. While many households were faring well, the report says, “sizable fractions of the population were at the same time displaying signs of financial stress.” Over 60% said their families were either “doing okay” or “living comfortably,” but one-fourth said that they were “just getting by” and another 13% were “struggling.” More than a third said they were somewhat worse off or much worse off financially than they had been five years earlier. The survey results also suggest that many households are not adequately prepared for retirement, the Fed said. Thirty-one percent of non-retired respondents have no retirement savings or pension, including 19% of those 55 to 64.

Reports/dates/facts/links worth paying attention to over the next week:

  1. August 12: U.S. Treasury monthly budget report (July).
  2. August 13: Retail sales (July); 10-year Treasury note auction.
  3. August 14: Weekly unemployment claims; 30-year Treasury bond auction.
  4. August 15: Industrial production (July); producer price index (July); University of Michigan consumer sentiment index (August); New York Fed Empire State manufacturing survey (August).
  5. The Atlanta Fed’s new GDP forecasting model: GDPNow

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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