Global Concerns Weigh on Markets Weekly Update – March 17, 2014

Image courtesy of FreeDigitalPhotos.net/Rajcreationzs

Image courtesy of FreeDigitalPhotos.net/Rajcreationzs

Equities experienced a rocky week as worries mounted about China’s economic state and tensions escalated in Ukraine. While investors were not panicking, the pessimistic mood contributed to the Nasdaq posting its first drop in six weeks. For the week, the S&P 500 lost 2.0%, the Dow lost 2.4%, and the Nasdaq lost 2.1%.1

Tensions in Ukraine ratcheted up last week as Western leaders, including U.S. Secretary of State John Kerry and German Chancellor Angela Merkel warned Russia against annexing Crimea. Despite the threat of sanctions, Russia launched military exercises near its border with Ukraine and has moved thousands of troops into Crimea and neighboring areas.

The crisis in Ukraine matters to an international audience because a diplomatic and military showdown between Russia and the West could have long-term consequences in Europe. Europeans fear a return to Soviet-era invasions of Eastern Europe as Putin’s interventionist foreign policy dreams become clear.2. Any sanctions against Russia could be very costly for Europe (less so for the U.S.). Europe relies on Russia for approximately 30% of its natural gas; Russia is also its largest trading partner, a relationship that is worth nearly $461 billion in imports and exports every year.3 Investors worry that a deterioration of the relationship between Russia and the rest of the world could affect the business environment.

Concerns about China also weighed on markets. A February report showed that exports fell 18.1% from the previous year; this is problematic because exports are a major driver of the Chinese economy.4 Worries about the Chinese economy were intensified by weaker-than-expected retail and industrial data, which showed that China might be slowing down.5 The recent first-ever debt default by a Chinese company also created new reservations about the health of China’s financial system.6 Investors fear that slowing economic activity in China may spread around the globe and cut into corporate profits.

One way to term investor reactions to these global concerns is a “flight to quality,” where investors are fleeing emerging market securities in search of quality investments in the developed world. Realistically, it’s unlikely that these concerns will go away quickly, meaning we can expect additional uncertainty and market volatility.

On a more positive note, new unemployment claims unexpectedly fell to a three-month low last week, raising hopes that the winter doldrums may be past. Even better, the four-week moving average, a less volatile measure, fell to the lowest level since early Decembe.7 Analysts will be looking closely at next week’s unemployment claims for hints about the monthly job numbers.

The Fed will take center stage this week as the Federal Open Market Committee (FOMC) meets to determine its next monetary moves. There is little doubt on Wall Street that the Fed will stay the course on tapering and announce another $10 billion cut to its quantitative easing programs, bringing monthly bond purchases down to $65 billion. Analysts will be watching especially close as this will be new Fed chair Janet Yellen’s first turn in the hot seat.8

ECONOMIC CALENDAR:

 

Monday: Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Housing Market Index

Tuesday: Consumer Price Index, Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, Fed Chair Press Conference

Thursday: Jobless Claims, Philadelphia Fed Survey, Existing Home Sales

 

Data as of 3/14/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

 -1.97%

 -0.39%

 17.78%

 28.67%

 6.43%

Dow

 -2.35%

 -3.08%

 10.50%

 24.48%

 5.69%

NASDAQ

 -2.09%

 1.65%

 30.27%

 39.31%

 11.39%

U.S. Corporate Bond Index

 0.59%

 1.75%

 -2.02%

 5.29%

 0.45%

International

 -3.75%

 -2.95%

 8.99%

 22.09%

 7.61%

Data as of 3/14/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.05%

0.08%

0.12%

1.55%

2.65%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Consumer sentiment slips. A measure of consumer confidence fell in early March. However, most of the slip was attributed to cold weather, which gives analysts hope that confidence will improve once the weather warms.9

Record drop in bond holdings points to Russia. A surprising decline in foreign holdings of U.S. Treasuries has led some experts to speculate that Russia is cutting its dollar reserves ahead of potential sanctions from the West. Foreign central banks sold $104.5 billion in Treasuries last week – more than three times the previous record amount.10

Retail sales rise slightly in February. Higher than expected retail sales show that Americans shopped more in February. Data shows that retail receipts rose 0.3% in February, ending two straight months of declines.11

Business inventories climb in January. U.S. business inventories rose at the beginning of the year as businesses restocked after the holiday shopping season. However, a drop in sales means that inventories are piling up in warehouses, forcing businesses to buy less in the first quarter.12

 

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