Economic reports out on Monday were generally positive, but Russia’s invasion of Ukraine had investors went scurrying for safety, sending the Dow Jones Industrials down 154 points or 0.9%. With stocks retreating around the world, Treasury bond prices jumped higher, as did gold and oil. The 10-year Treasury note climbed almost one-half point today, its yield dropping to 2.60%, its lowest level in a month. Commodities prices went higher, especially crude oil and gold, each up by 2%. Currency weakness continued in the Russian ruble, which hit another new low against the dollar. The Japanese yen, generally seen as a safe-haven currency along with the dollar, hit its strongest level in a month, while the dollar rose roughly 0.5% against a trade-weighted basket of major currencies.
How the crisis in Ukraine gets resolved is a major uncertainty, particularly in Europe, where share price declines were two to three times those in U.S. stocks. European shares have been the global equivalent of high-beta stocks in recent months, rising more strongly on the markets’ up days, and now falling more sharply in this sell-off. Germany’s DAX and Italy’s FTSE-MIB indexes lost in excess of 3% Monday. The yield on the 10-year German bund fell seven basis points today to a seven-month low of 1.55%. Other European sovereign bond yields were flat or down modestly, indicating some anxiety about the effects of Ukraine crisis on peripheral Europe.
U.S. personal income rose 0.3% in January, the Commerce Department reported today, a tick better than Wall Street was expecting. Consumers managed to increase spending 0.4% for the month, also better than Street projections, although by only as much as the government’s estimate of December’s spending was revised lower (from +0.4% to +0.1%). The first indications of consumer spending for February, contained in auto sales figures released during the day Monday, suggest that sales continue to be constrained by bad winter weather: total vehicle sales for February came in at a 15.3 million unit annual rate, a touch worse than Street estimates (15.4 million) and a touch better than January’s selling rate (15.2 million) but off around 6% from the cycle peak in November (16.3 million).
Weather’s impact was also seen in the manufacturing sector during February, although the headline ISM purchasing managers’ index reading of 53.2 was an improvement on the Street’s forecast (52.3) and on January’s reading (51.3). The ISM index for production, though, dipped into contraction territory, its 48.2 reading the lowest since the recession was winding down in the summer of 2009, as a number of firms reported weather-related disruptions. More positive was the new orders index, which increased to a reading of 54.5, up from January’s 51.2. Employment continues to expand but at only a modest rate; February’s 52.3 reading matched January’s in positive territory (a reading above 50 means more industries are reporting expansion than are reporting contraction), but the early 2014 levels are a good bit below the improved levels seen in 2013’s second half.
Unlike bad weather, which will one day give way to spring, the Russia/Ukraine contretemps has the potential to linger and get far worse. We do not believe that the Cold War has begun anew, but adverse developments in the Crimea and Ukraine could spill over in ways not conducive to economic growth or higher price/earnings multiples for stocks. We take some encouragement from the Dow’s ability to rally back from today’s worst levels at around noon, when it was down 250 points.
Reports/dates/facts/links to watch for over the next week:
- March 5: ADP national employment report for February; ISM non-manufacturing index for February; Federal Reserve Beige Book.
- March 6: Weekly unemployment claims; factory orders for January;
- March 7: Labor Department payrolls and unemployment report for February.
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.