Market Analysis

Beyond the Numbers

Markets Poised For Sell-off on Geopolitical Risks
7/31/2014 9:13 AM

The major U.S. index futures are pointing to a notably lower opening on Thursday, with geopolitical tensions worrying markets to no end. The ramification of the Ukraine crisis is slowly unfolding, with Adidas forewarning of a profit hit from potential crippling of its Russian business. Additionally, the default by Argentina could have a psychological effect on the markets. In the process, economic data and earnings could take a backseat.

U.S. stocks ended Wednesday’s session mixed following the release of strong second quarter GDP data and the FOMC decision. The major averages started the session higher after a report showed that the economy expanded more than expected in the second quarter. However, the averages surrendered their gains by late morning trading. The Dow Industrials and the S&P 500 Index continued to languish in negative territory, although they recovered following the release of the FOMC statement only to move back below the unchanged.

The Dow Industrials closed down 31.75 points or 0.19 percent at 16,880, while the S&P 500 Index firmed up in late trading, ending the session up 0.12 points or 0.01 percent at 1,970. The Nasdaq Composite held above the unchanged line throughout the session before closing up 20.20 points or 0.45 percent at 4,463.

Nineteen of the thirty Dow components closed lower, while the remaining eleven stocks advanced. Disney (DIS), Home Depot (HD) and Nike (NKE) rose sharply, while Caterpillar (CAT), DuPont (DD), Coca-Cola (KO) and UnitedHealth (UNH) moved to the downside.

Utility, gold and housing stocks saw notable weakness on the day, while semiconductor, financial and retail stocks gained ground.

On the economic front, the FOMC statement showed that the Fed assessed that economic growth rebounded in the second quarter. The central bank also noted that the unemployment rate has declined further even while cautioning that there remains underutilization of labor resources. The rest of the statement was largely unchanged.

The Fed also persisted with its measured pace of unwinding stimulus, as it announced another $10 billion reduction in its asset purchase program.

Meanwhile, the Commerce Department reported that U.S. GDP rose 4 percent sequentially in the second quarter, while the contraction in the first quarter was upwardly revised to 2.1 percent from 2.9 percent.

Consumer spending rose a solid 2.5 percent, driven by spending on durable goods. Inventories added 1.7 percentage points to growth and government spending added 0.3 percentage points to GDP, while net trade served as a drag, as import growth outpaced export growth.

Meanwhile, ADP’s report showed that the private sector added a less than expected 218,000 jobs in July.

Commodity, Currency Markets

Crude oil futures are sliding $0.66 to $99.61 a barrel after receding $0.70 to $100.27 a barrel on Wednesday.

The previous session’s decrease came amid the release of the weekly petroleum status report, which showed that crude oil stockpiles fell by 3.7 million barrels to 367.4 million barrels in the week ended July 25th. Notwithstanding the decline, inventories were in the upper half of the average range for this time of the year.

Meanwhile, gasoline stockpiles increased by 0.4 million barrels and were in the upper half of the average range. Distillate inventories rose by 0.8 million barrels but were near the lower limit of the average range.

Refinery capacity utilization averaged 93.2 percent over the four weeks ended July 25th compared to 92.6 percent over the four weeks ended July 18th.

Gold futures, which dipped $3.60 to $1,296.90 an ounce in the previous session, are currently slipping $6.70 to $1,290.20 an ounce.

Among currencies, the U.S. dollar is trading at 102.96 yen compared to the 102.79 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.3375 compared to yesterday’s $1.3397.


The Asian markets closed on a mixed note, with the lackluster close on Wall Street not inspiring much confidence in the minds of traders. The Japanese, South Korean and Taiwanese markets ended lower, while most of the remaining major markets in the region ended higher.

Japan’s Nikkei 225 average, which stayed afloat for much of the session in the wake of subdued trading by the yen, retreated in a late hour sell-off. The index ended down 25.46 points or 0.16 percent at 15,621.

Resource, food, telecom, construction, utility, financial and pharma stocks came under selling pressure, while export stocks ended mostly higher.

Meanwhile, Australia’s All Ordinaries held mostly above the unchanged line before closing up 8 points or 0.14 percent higher at 5,623. Most sectors gained ground, with the exception of real estate, material, energy and industrial stocks.

Hong Kong’s Hang Seng Index ended at 24,757, up 24.64 points or 0.10 percent, and China’s Shanghai Composite Index rallied 20.32 points or 0.93 percent before closing at 2,202.

On the economic front, data released by the Australian Bureau of Statistics showed that building approvals in Australia unexpectedly fell in June compared to the previous month.

On the other hand, private sector credit in Australia rose a better than expected 0.7 percent in June, according to a report released by the Australian Bureau of Statistics.

Japan’s Ministry of Land, Infrastructure, Transport and Tourism reported that housing starts in Japan fell less than expected year-over-year in June.

Meanwhile, total labor cash earnings in Japan increased at a slower than expected rate in June, a report from the Ministry of Health, Labor and Welfare showed.


European stocks opened higher but have given back their gains since then and are currently trading notably lower amid the release of mixed corporate news.

In corporate news, BNP Paribas reported a huge loss for its second quarter, hurt by charges, while Sanofi (SNY) raised its guidance after reporting strong quarterly results.

Alcatel-Lucent (ALU) reported a narrower loss for its second quarter. Siemens’ (SI) third quarter results were ahead of estimates, although it sees risks from geopolitical crises. Shell’s (RDS) earnings rose strongly in the second quarter.

AstraZeneca (AZN) also reported strong second quarter results, while brewer Diageo’s earnings were hit by weakness in the emerging markets. Adidas issued a warning, citing Russia and weakness in Golf.

On the economic front, Nationwide reported that U.K. house price growth slowed in July. A consumer confidence reading for the U.K. released by GfK showed that confidence among U.K. consumers declined in July, with the index slipping to –2 from 1 in June.

The German Federal Labor Agency reported that the unemployment rate in Germany came in at 6.7 percent in July, in line with estimates.

Meanwhile, the results of the labor force survey by the German Federal Statistical Office showed that there were 2.12 million unemployed in June, down 166,000 or 7.4 percent from last year. The unemployment rate held steady at an adjusted 5.1 percent in June. Eurostat reported a slowdown in its annual inflation to 0.4 percent in July, while economists expected inflation to stay at June’s 0.5 percent level.

U.S. Economic Reports

First-time claims for U.S. unemployment benefits rebounded in the week ended July 26th, according to a report released by the Labor Department, with initial jobless claims bouncing off the fourteen-year low seen in the previous week.

The report said initial jobless claims climbed to 302,000, an increase of 23,000 from the previous week's revised level of 279,000. Economists had expected jobless claims to rise to 301,000 from the 284,000 originally reported for the previous week.

Also at 8:30, the Labor Department is scheduled to release its employment cost index for the second quarter. The consensus estimate calls for a 0.5 percent sequential increase in the employment cost index for the quarter, quicker than the 0.3 percent increase in the first quarter.

MNI Indicators is due to release the results of its business survey for the Chicago region at 9:45 am ET. Economists expect the business barometer to rise to 63.2 in July from 62.6 in June.

In June, Chicago-area business activity grew at a slower rate in June. The Chicago business barometer fell to 62.6 in June from 65.5 in May.

Stocks in Focus


Among insurers, MetLife’s (MET) second quarter operating earnings trailed estimates, while its revenues were ahead of estimates. Hartford (HIG) reported below consensus earnings and revenues for its second quarter, while Unum (UNM) reported better than expected second quarter results.

In the tech space, Western Digital (WDC) reported fourth quarter earnings and revenues that beat estimates. Akamai Technologies’ (AKAM) second quarter results were also ahead of expectations.

RealNetworks (RNWK) appointed its founder Rob Glaser as its permanent CEO after he served the company in the position on an interim basis. The company reported a wider loss and lower revenues for its second quarter.

Avon Products’ (AVP) second quarter results missed estimates. Hyatt Hotels (H) reported better than expected second quarter earnings. DirecTV (DTV) and Mastercard (MA) also reported better than expected second quarter results. Exxon Mobil’s (XOM) second quarter results also topped estimates.

Fidelity National Financial (FNF) reported second quarter earnings that were ahead of estimates. Weight Watchers’ (WTW) second quarter results exceeded estimates and the company raised its 2014 earnings guidance.

Williams Companies reported second quarter earnings that were better than expected, while Tw Telecom (TWTC) reported second quarter earnings that were in line and its revenues exceeded estimates.

Manitowoc (MTW) reported second quarter earnings and revenues that trailed estimates. Barrick Gold’s (ABX) second quarter results also trailed estimates. Meanwhile, Noble Corp.’s (NE) second quarter results exceeded estimates.

AmSurg (AMSG), Boyd Gaming (BYD), Edison (EIX), Expedia (EXPE), Fluor (FLR), Liberty Global (LBTYA), LinkedIn (LNKD), PMC-Sierra (PMCS), Western Union (WU) and YRC Worldwide (YRCW) are among the companies due to release their quarterly results after the close of trading.

Other Corporate News

ON Semiconductor (ONN) announced an agreement to pick up a minority stake in Fujitsu’s 8-incjh wafer fab in Aizu-Wakamatsu for $7 million, with the agreement also providing for Fujitsu manufacturing wafers for ON Semiconductor.

Tyson Foods (TSN) said it has priced its concurrent public offerings of 23.81 million shares of its Class A common stock at $37.80 per share and 30 million of its 4.75 percent tangible equity units, with each tangible equity unit having a stated amount of $50.

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