Investors Reduce Geopolitical Risk Premia from Safe Assets
Today's financial recap and tomorrow's financial outlook.
Much of the safety trade, deriving from a perceived tension between Russia and Ukraine on Friday, was unwound today. This came in the form of a rally for the German DAX, a selloff in German Bunds and UK Gilts, and a large drop in Brent crude oil. The perceived fighting between the two on Friday were largely written off to the fog of war. Overnight, 64 of 70 cities in China suffered home price declines, the worst since record keeping began. Also in China, the People's Bank of China (PBoC) said in a commentary that it would not allow further corporate defaults due to the sizable downside risks already present in the economy.
US equities shot higher in overnight trade and remained there for much of the session. The S&P 500 (SPX) shot up to a gain of 14.5 points in the opening 30 minutes and then traded in a four point range for the remainder of the session. Industrials and tech stocks continued to very strong, while the interest rate sensitive utilities and telco sectors finished in the red. The 10-year Treasury yield was five basis points higher after making a year-to-date low on Friday.
On the M&A front, Dollar General (DG) made a $9.7 billion offer for Family Dollar (FDO) in an attempt to outbid Dollar Tree (DLTR). The two deals amount to $78.50 and $74.50 per share. If Family Dollar were to take the bid from Dollar General it would be subject to a $350 million break fee.
The August home builder and real-estate agent confidence index rose to 55 from 53 last month, which was also the expected figure. Builders began to see a noticeable increase in the number of serious buyers entering the market, according to NAHB's Chairman Kevin Kelly, who's firm conducts the survey. He noted challenges in still tight credit and a shortage of finished lots and labor.
Tomorrow's Financial Outlook
A very important piece of data is due to be reported tomorrow: July consumer prices. Recently, the input prices showed a slowing acceleration in the same month, which increases the risk that output prices will have a similar deceleration. Prices are expected to rise 0.1% from the prior month and 2% from a year ago. Core prices are expected to rise 0.2% to 1.9% from a year ago. Also due to be reported are housing starts and building permits from July. The building materials component from the July retail sales report showed strong growth and real-estate surveys have been reflecting increased optimism.
Globally there is not a great deal of data scheduled to be reported until Thursday. The only report of note overnight is the UK consumer price index for July. Mated with the same report from the US, it could cause considerable movement in sovereign interest rates. Bank of England Governor Mark Carney has had the propensity to talk out of both sides of his mouth and on Sunday he said that the central bank may hike rates before wages begin to show an increase. To put it frankly, in this author's opinion, Carney has been all over the map. And the BoE is most likely the first in the G-7 to begin a tightening process, roughly six months ahead of the US Fed.
Only four companies are scheduled to report earnings tomorrow in the US. They are Home Depot (HD), Dick's Sporting Goods (DKS), Medtronic (MDT), and TJX (TJX).
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