Stocks fall, bonds rise on international worries

Concerns about escalating hostilities between Ukraine and Russia and the Middle East situation trumped a bevy of upbeat U.S. economic reports, knocking stock prices down on Thursday.

Equities opened lower on news that Ukraine had accused Russia of an outright invasion of the country to fight alongside pro-Russia rebels. Nevertheless, after hitting their lows of the day shortly after the opening, stock prices moved higher the rest of the day, albeit remaining in negative territory all day. Both the Dow and NASDAQ closed down 0.3% while the S&P 500 fell 0.2%. Utilities (+0.7%) were one of only two sectors in the S&P to close higher, as investors sought safety; materials closed with a 0.1% gain. Likewise, the Dow Jones Utilities Average closed up 0.5%. By contrast, investors sold small cap stocks, as the Russell 2000 and the S&P 600 both fell 0.6%, or about twice as much as the bigger-cap indexes.

U.S. and German government bond prices also rose on the international worries while investors took profits in Spanish and Italian bonds following their recent run-up. The 10-year German bund gained ¼ point in price to lower its yield to another record low of 0.88% at the close. The yield on the bund has dropped by more than 100 basis points – i.e., by more than half – since the beginning of the year and by nearly 30 bps just in the past four weeks. The yield on the comparable U.S. note fell two bps to 2.34%, matching a 14-month low. But the yield on the Spanish 10-year bond jumped nine bps to 2.23% and the Italian bond rose five bps to 2.44%, their first increases in eight days.

European stocks were lower on profit-taking brought on by the growing war fears as well as a lower than expected read on consumer confidence in the euro zone. Italian stocks dropped 2% while German and Spanish stocks fell more than 1%. The Stoxx Europe 600 fell 0.7%. The European Commission said its European Sentiment Indicator fell to 100.6 in August, its lowest level this year, down from 102.1 in July. Stocks were also mostly lower in Asia on the order of 0.5% or more. The exception was India, where the Sensex index gained 0.3%.

U.S. economic reports were strong across the board.

  • The first revision of second quarter GDP said the economy grew at an annual rate of 4.2%, up from the 4% initial estimate, helped by a big increase in business investment. The Street was expecting no change.
  • Corporate profits rose 4.5% in Q2 compared to a year ago, up from a downwardly revised 2.4% rise in Q1.
  • The National Association of Realtors’ pending home sales index rose 3.3% in July to 105.9, its fourth increase in the past five months and its highest level in 11 months, although it remained 2.1% below the year earlier figure of 108.2.
  • Unemployment claims fell slightly to 298,000 last week.

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

  1. August 29: U.S. personal income, spending and inflation (July); University of Michigan consumer sentiment (August final); flash Eurostat estimate of EU inflation (August).
  2. August 31: Markit/JMMA manufacturing PMI for Japan (August); Markit manufacturing PMI for China (August).
  3. September 1: Euro-zone manufacturing PMI survey for August; U.S. markets closed for Labor Day.
  4. September 2: ISM manufacturing purchasing managers’ survey (August); U.S. construction spending (July).
  5. September 3: ADP national employment report.
  6. September 4: ISM non-manufacturing purchasing managers’ survey (August); weekly unemployment claims.
  7. September 5: Labor Department report on unemployment and payrolls (August).

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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