Investors could be forgiven for their exhaustion with geopolitical risk factors, with much of the focus in recent weeks on Gaza, the ISIS conflict in Syria and Iraq and eastern Ukraine. The fears sparked by these regional conflicts has yet to make a dent in investor sentiment however, with the S&P 500 reaching above 2,000 for the first time yesterday. With downbeat economic data from Europe and dovish commentary from the U.S. Federal Reserve have kept risk asset markets buoyed, as accommodative policy appears to remain the order of the day for the developed world’s central banks. Additionally, U.S. economic growth appears on track. David Rosenberg, chief economist and strategist at Toronto–based wealth management firm Gluskin Sheff + Associates, noted yesterday that the Conference Board Leading Economic index continues to register annualized expansion — a strong signal that a relapse for the U.S. economy is unlikely.
Swiss banks begin to lift their veil. Geneva–based private bank Pictet for the first time in its 209-year history today released financial results. During the first half of 2014, the bank earned 203 million Swiss francs ($222 million). Pictet’s results are part of a wave of first-time public financial disclosures by historically secretive Swiss private banks that have restructured from traditional partnership models in response to intensified regulatory scrutiny. Pictet’s 218-year-old competitor Lombard Odier, also based in Geneva, is set to release financial results for the first time on Thursday.
Home prices in the U.S. predicted to show a drop. The U.S. S&P/Case-Shiller June 20-city price index, due to be released today, is forecast to come in at 8.2 percent year-over-year from 9.3 percent in the prior month. While consensus forecasts call for a 0.1 percent month-over-month increase, Société Générale economists noted in a report this morning that recent data from Irvine, California–based CoreLogic suggests a marginally stronger showing for the widely followed index after an unexpected dip in May.
Mood at U.S. cash registers has soured a bit. The August Conference Board consumer confidence headline index is forecast to contract to 89.1 from 90. Separately durable goods orders for July will be released with forecasts for the headline index to advance, largely on the back of an increase in the volatile aeronautical segment.
Canadian banks report earnings. Bank of Montreal and Scotiabank will release earnings for the third fiscal quarter today. The third-quarter announcement from Royal Bank of Canada saw the largest member of the so-called Big Five of Canadian banks report a record net income of C$2.38 billion ($2.17 billion).
Industrial production in Taiwan exceeds forecasts. July production data in Taiwan registered a stronger-than-forecast expansion of 6.8 percent year-over-year, the sixth consecutive improvement on a yearly basis. Manufacturing accounted for the majority of gains while the construction subindex registered a double-digit year-over-year contraction. With data due to be released this week from South Korea and Japan, the health of the industrial sector in developed Asia will be a focus for macro market narratives.
South Africa squeaks through. Second-quarter gross domestic product results released today saw South Africa narrowly avoid recession at an annualized 0.6 percent, a reading that was lower than economists’ consensus forecasts. Although this marks a rebound from the first quarter’s labor-induced slump, officials at South Africa’s finance ministry have indicated that a reduction in government full-year growth targets is likely.
Portfolio Perspective: U.S. Treasury Yields Continue to Attract Offshore Buyers — Karl Haeling, Landesbank Baden-Württemberg
While recent U.S. economic data has been fairly positive, it contrasts sharply with weakening conditions in China, Europe and Japan. The dramatic plunge in European bond yields this year continues to make Treasuries look attractive on a global basis. Asian investors have responded with big Treasury purchases in recent months. There are many different factors supporting U.S. bond prices but by far, this is the most influential.
The weakening yesterday of shorter-dated notes partly reflects an attempt by the market to create a underwriting cushion for this week’s auctions. Treasury will sell $29 billion in two-year notes Tuesday; $13 billion in two-year floating-rate notes and $35 billion in five-year notes Wednesday; and $29 billion seven-year notes Thursday. But this is just part of the story. Although Janet Yellen continues to promote dovish monetary policy, the market is steadily discounting higher rates by the middle of 2015 by way of the flattening yield curve, now the flattest it has been since January 2009.
But as much as it has already flattened, it is still relatively steep to previous periods when the Fed is tightening or is expected to do so. The yield spread between five- and 30-year Treasury paper has narrowed to a positive 147 basis points from 254 late last year yet is still well above the approximately 8 basis points or so that prevailed in 2007 during the months before mortgage problems started to emerge. We doubt Fed hawks will be able to force early rate hikes. As long as U.S. growth remains moderate, however, it will be difficult for the doves to postpone them much beyond mid-2015.
At the same time, as long as data in so many other major economies around the world continues to soften, it is unlikely that relatively strong U.S. reports generate much in terms of bearish pressures for longer-dated Treasuries. For one, if most of the world is weakening, it will be difficult for U.S. growth to accelerate as global disinflation pressures build. And for another, the more that foreign bond yields fall, the more attractive U.S. bonds become.
Karl Haeling is head of strategic debt distribution at Landesbank Baden-Württemberg’s New York office.
