Bonds outshine stocks as global worries grow

U. S. stocks closed mostly mixed on Friday and up for the week, but bonds grabbed the spotlight.

The three major stock indexes seemed headed for their third straight gain on Friday until midmorning when it was reported that Ukrainian troops attacked a military convoy that entered the country from Russia. That sent stocks downward but only until about noon, when prices started to recover. The Dow, down 0.8% at that point, moved higher the rest of the day to cut its loss to 0.3% and end the week with a 0.7% gain. The S&P 500, down 0.7%, fought back to unchanged and finished the week 1.2% higher. NASDAQ outperformed the two big-cap indexes, ending the day up 0.3% and 2.2% for the week.

Bonds were big winners this week, as investors sought havens from global tensions and more signs of a weakening global economy. Economic news from around the world this week was mostly negative, including a 1.7% drop in Japanese GDP in the second quarter, flat growth in the euro zone, flagging investor confidence in Germany and weaker than expected July U.S. retail sales. That news, combined with continued tensions in eastern Europe and the Middle East, sent investors into sovereign bonds, driving yields down to record low levels. On Friday, both the 10-year U.S. Treasury note and the comparable German bund rose more than ½ point each to lower their yields by six basis points, the T-note to 2.34%, its lowest level since June 2013, and the bund to a record 0.95%. The securities started the week at 2.42% and 1.05%, respectively. Italian and Spanish 10-year bonds fell even more, by 21 and 16 bps, respectively.

Friday’s U.S. economic reports continued the downtrend, as most reports came in weaker than expected. The exception was July industrial production, which rose 0.4%, unchanged from the prior month’s upwardly revised figure. Outside that, the news was worse. The University of Michigan’s consumer sentiment index for August fell to 79.2, down from 81.8 previously and more than three points below the Street forecast. The expectations component fell 5.6 points to 66.2, the lowest reading since last October. The New York Fed’s Empire State index for August fell nearly 11 points to 14.69, well below the consensus estimate of 20, indicating a slowing in the metro region’s economy. New orders fell to 14.14 from 18.77. U.S. producer prices rose a modest 0.1% in July, down from June’s 0.4% gain, mainly due to the decline in fuel costs. On a year-on-year basis, prices rose 1.7%, down from the previous month’s 1.9% increase.

European stocks managed to hold onto gains for the week despite losses on Friday. The Stoxx Europe 600, for example, lost 0.4% Friday on the Ukraine news but was up 1.5% for the week. Germany’s DAX index lost nearly 1.5% on Friday but still held onto a 0.9% rise for the week. Both Italian and Spanish stocks rose more than 1% for the week despite falling on Friday.

Most Asian markets were up nearly every day this week and finished with the best gains among the major global indexes. The best gainer of the week was the Nikkei 225, which rose 3.7% after posting a fractional increase on Friday, its fifth straight gain. The Sensex had the next best gain, 3.1%, despite Indian markets being closed on Friday. Hong Kong’s Hang Seng index and the Shanghai composite were up 2.6% and 1.5%, respectively, after rising again on Friday.

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

  1. August 18: National Association of Home Builders housing market index (August).
  2. August 19: Housing starts (July); consumer price index (July).
  3. August 20: Minutes of the Federal Reserve’s July 30 monetary policy meeting are released.
  4. August 21: Weekly unemployment claims; existing home sales (July); leading indicators (July); Philadelphia Fed 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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