The Market Today

Geopolitical Tensions Roil Markets Globally

by Craig Dismuke, Dudley Carter

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Geopolitical Watch and Markit Revisions: The only two releases on today’s calendar are the final revisions to Markit’s December reports on service-sector activity and the associated composite index.  More important will be tomorrow’s ISM Non-Manufacturing index.  For today, investors are likely to be more dialed in to the geopolitical headlines.


Geopolitical Risk Remains Front of Mind: Monday’s market focus remains squarely on tensions in the Middle East that were ratcheted higher last week after the U.S. killed a top Iranian commander in an airstrike in Baghdad. The initial response to the attack on Friday was a textbook one, with haven assets such as Treasurys and gold rising in price, oil rallying on fears of supply disruptions, and equities weakening amid the uncertainty. Over the weekend, Iran said it would no longer abide by restrictions in the 2015 nuclear agreement and reaffirmed its pledge to retaliate. Adding to the geopolitical uncertainty, Iraq’s parliament voted to force the U.S. military from its posts in the country. President Trump warned Iran against retaliation and said sanctions would be placed on Iraq if they followed through with kicking U.S. forces out.

Bond Yields Steady While Risk-Off Remains Prevalent in Other Markets: While the bid for sovereign bonds has eased, the price of oil and gold has continued to climb and equities around the globe remain weak. Both U.S. WTI and Brent crude were just under 1% higher Monday following more than 3% gains on Friday. Gold tacked on another 1.6% to its surge and was trading at a six-and-a-half-year high. The MSCI Asia Pacific Index earlier closed down 1% and Europe’s Stoxx 600 was trading down 0.9% just before 7 a.m. CT. U.S. equity futures were off their lows but still 0.5% weaker. Treasury yields, however, had steadied somewhat after two days of declines. The 2-year yield was up 0.8 bps to 1.53% at 7:15 a.m. while the 10-year yield had dropped 1.0 bps to 1.78%. The benchmark yield had climbed as high as 1.94% last Thursday.


Construction Data Shows More Evidence of Improving Activity: Friday’s economic data were mixed with a strong construction spending report but a very disappointing reading on manufacturing activity.  November’s construction spending report was stronger than expected, rising 0.6% for the month along with revisions showing October’s spending rose 0.1% rather than declining 0.8% at initially reported.  The strength came from a 1.9% gain in private residential (housing) and 0.9% increase in public construction spending.  Public activity accounts for 26% of total construction spending and is now up 12.4% year-over-yearResidential accounts for a larger, 40-percent share and is now up 2.7% year-over-year.

ISM Report Shows Manufacturing Activity Falling Further: The December ISM Manufacturing index’s disappointment overshadowed the positive construction data.  Confirming that manufacturing remains in a rut, the headline index did not rebound as-expected but fell from 48.1 to 47.2, the lowest reading of the cycle.  The details of the report offered no solace with broad-based weakness.  The new orders index fell to its lowest level of the cycle.  The employment index dropped to the second-lowest reading of the cycle to a level consistent with stagnation in manufacturing payrolls.

ICYMI – January 3, 2020 Weekly Market Recap: The new year started with escalating geopolitical tensions after a Thursday U.S. airstrike took out Iranian Commander Soleimani who had traveled to Baghdad. The market response was typical as investors opted for safety in Treasurys and gold, snatched up oil contracts in case of supply disruptions, and shed riskier equity positions. In addition to the geopolitical concerns, a top U.S. manufacturing report was weaker than expected and broke with messaging that the industrial sector’s struggles may be behind it. The late-week worries dragged equities down from record levels and led the 10-year yield down 8.8 bps on the week. The risk-off rally in bonds also pulled the spread between the 2-year and 10-year Treasury yields to 25.7 bps, notably flatter than the 18-month high of 34.4 bps that the key measure ended 2019 at on Tuesday. Click here to view the full recap.

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