August 11, 2014

European Stocks Gain with Asia as Bonds Slide; Won Climbs

• As tension eased in Ukraine and t U.S. showed signs of pushing back militants in Iraq
• The euro weakened
• U.S. equities rallied on Aug. 8 Russia said warplanes ended drills near Ukraine. Israel and militants in the Gaza Strip agreed to an Egyptian-brokered truce

Treasuries Fall as Geopolitical Tensions Ease, Yields Dim Allure

• Treasuries ▲as easing political tensions in Ukraine and Gaza reduced demand for the safest assets before the U.S. sells $67 billion of notes and bonds this week
• Gains last week pushed 10-year yield to the lowest in more than a year, with the extra yield on the securities over the consumer-price index reaching the narrowest since April 2013 as geopolitical unrest fueled haven demand
• Treasuries have still underperformed stock this year, with the MSCI All-Country World Index ▲4.4% including reinvested dividends
• While U.S. economic growth rebounded last quarter from the biggest contraction in five years, inflation that has held in check helped lure investors to fixed-income securities

Thought

Like what I told in the "August Week 2 Preview," treasuries fall and stock index rises as geopolitical risks ease. Investors are frightened by geopolitical risks too much. A lot of economic indicators signs a positive signal, especially in U.S., China and U.K.

Fed’s Fischer Says Participation Drop May Reflect Slow Growth

• He said sluggish labor supply growth is a “source of concern”
• It may contribute to a slowdown in longer-run output of economy
• Which also faces a drag from housing and “broad based” slowing across emerging markets
• Falling labor-force participation largely reflects an aging population, though there’s “considerable uncertainty” about how much is due to the sluggish economy
• Share of working-age people in the labor force is 62.9%, near the lowest since 1978
• “Many of those who dropped out of the labor force may be discouraged workers. Further strengthening workers back into the labor market…”
• For the U.S., weakness in housing markets, a drag from government budget cuts and weaker European growth are “all prominent factors that have constrained the pace of economic activity”
• Recoveries in advanced economies have been “well below average” while the pace of growth developing nations “has been disappointing”
• Fischer said the so-called quantitative easing program has been “largely successful.”
• “Raising the rate of interest paid on excess reserves should play a central role in the eventual normalization of short-term interest rates. An overnight reserve repo facility could also play a useful part in setting a floor under money market rates."

Thought

high unemployment rate and increment in discouraged workers and part-time-job-for-economic-reason employ are the issues here. In fact, discouraged workers have been declined from 988 to 741 over a year. But what Fischer worries is that it tends to increase last three months (697K in May, 741K in July). It means that more people quit looking for a job, which will eventually decrease household spending and hurt economy.

Today, I'd like to focus on Asian market

Most of Asian stock increased today. NIKKEI raised 2.38%, which is the biggest increase in three months. Shanghai and Shenzhen also increased 1.38% and 1.48%.

They commonly had a big slump last week. Today's increment is more like a rebound from last week's slump. As geopolitical risks ease and big economic indicators await later this week, investors' expectation rose.

U.S. stock market showed increment yesterday; S&P 500 increased by 0.28%. Thanks to good earning on Sysco, CONS STPL sector increased by 0.76%.

Trading volume was significantly low. As economic indicator and earning season is almost over, there is engine to boost the stock market for now. Good news came from Fischer yesterday that the Fed considers the rising interest rate is the last resort, which means that it has no plan to do it soon. As the Fed keeps the fiscal policy as it is now, no surprise downturn or Fed taping is expected for a while.

EUR depreciated as ECB considers to use monetary policy as growth slowdown recently.

Overall, today's market shows a restricted movement. Not all geopolitical risks are solved (even though it eased) and no significant indicators have released. Similar movement is expected today

Sources:

http://www.bloomberg.com/news/2014-08-11/treasury-real-yield-at-15-month-low-before-67-billion-of-sales.html

http://www.bloomberg.com/news/2014-08-11/fed-s-fischer-says-participation-drop-may-reflect-slow-growth.html