Market and economic update: Geopolitics capture markets’ attention
Geopolitical issues remained at the forefront of market attention. Israel invaded the Gaza Strip in retaliation for the continued rocket attacks. Ukrainian separatists seem to have mistakenly shot down a Malaysian Airlines flight. President Obama extended sanctions against additional Russian financial institutions to pressure an end to Russia’s interference in Ukraine.
These events led to rising market volatility, but by the end of the week the most important factor remained the easy monetary stance of central banks in the United States, Europe, and Japan, leaving markets only modestly changed and positive economic momentum in place. Russia is the exception as economic momentum remains negative, propelled by U.S. sanctions. The only positive issue was a four-month extension for negotiations with Iran over its nuclear development. We expect geopolitical issues to remain a risk factor for the global economy over the rest of the year. However, we are unlikely to see a negative impact on the positive global economic trend, unless these risks lead to a spike in oil prices.
U.S. economic data indicated the U.S. economy remains healthy, although the pace of growth does not seem to be accelerating. Retail sales rose just 0.2% in June, well below consensus estimates but consistent with modest growth in consumer spending. Unemployment claims fell to their lowest level in seven years (just 302,000 last week), which is consistent with the continued improvement in the U.S. jobs market. Industrial production grew 0.2% for June, indicating continued expansion in business activity. The week finished with the Conference Board’s index of Leading Economic Indicators rising 0.3%, indicating the economy seems to remain on its path of modest expansion.
Data from Asia indicated economic growth improved. Second-quarter GDP growth for China rose to 7.5% year over year from a first-quarter year-over-year pace of 7.4%. An improvement in investment and industrial production drove better data. In Japan, the recovery from the increase in consumption tax seems to have been absorbed by the economy as industrial production improved in May over April.
In the eurozone, industrial production fell 1.1% in May, perhaps indicating the recent improvements in economic growth may be moderating, likely due to the deleveraging in the financial system. On balance, economic growth seems to be seeing modest improvement around the world.
For more information, go to https://reserve.usbank.com/insights/market-update-7-21-14.
Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.
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