Week of March 17, 2014
Investors Fret Over Foreign Friction
It certainly seemed that the Russia-Ukraine drama was short-lived two weeks ago when markets quickly rebounded following a harsh sell-off of risky assets. However, despite the initial rebound and achievement of new highs for the S&P 500, last week featured significant selling pressure on stocks. News from overseas, primarily from Russia’s persistent efforts to annex the Crimea region of Ukraine and China’s weaker than anticipated economic readings, gave investors enough reason to send the S&P 500 2 percent lower last week, the worst weekly performance in the last seven weeks.
Exit Polls Indicate Crimea Votes to Join Russia
Drama from abroad seemed poised to vanish as quick as it appeared, but last week proved that the Russia-Ukraine soap opera is likely to linger for awhile longer. With an estimated voter turnout of about 70 percent, which according to Zero Hedge exceeds the voter turnout of every U.S. Presidential election since 1900, 93 percent of voters have reportedly voted for Crimea to join Russia. While those figures are staggering, U.S., U.K. and European Union leaders are vehemently refusing to recognize the results. Western leaders are concerned about the massive military presence of Russia in the area, and are reportedly preparing economic sanctions against Russia similar to those that have been used against Iran. While it’s important to not sensationalize political situations, this particular situation does seem to have investors at least temporarily nervous, and appears likely to result in selling pressure until some sort of resolution is in sight.
Chinese Data Disappoints
Last week featured a plethora of economic reports coming out of China, and nearly all of it was disappointing. Retail sales advanced at an 11.8 percent rate in the first two months of the year, which according to Bloomberg is the slowest pace in ten years. Fixed asset investment grew 17.9 percent, which was much lower than the expected 19.4 percent. This new batch of data led to many investment banks downgrading their growth forecasts for China’s economy throughout the remainder of 2014. Most however, still predict that China’s gross domestic product (GDP) will exceed 7 percent growth this year. While that is an exceptional growth rate for the second largest economy in the world, it’s a serious deceleration from the blistering pace at which China’s economy has grown accustomed to advancing. Furthermore, investors are becoming increasingly more anxious about the prospects of default risk, as China’s economy has grown on the backs of an explosion of credit. It’s believed that China’s shadow-banking industry exceeds $6 trillion, and should economic conditions worsen too quickly investors are beginning to weigh the possibilities of a widespread credit calamity.
Side Note of the Week
While consumer confidence surveys are always difficult to understand, and quite frankly not entirely too accurate at predicting the mindset of U.S. shoppers, one interesting gauge is flashing signs that Americans are feeling good. According to WardsAuto, cars have accounted for only 47.4 percent of total vehicle sales so far this year as purchases of pickup trucks and crossover vehicles soar. While the USA Today article points out there is some sort of structural shift in demand that is perhaps driving some of this purchasing behavior, it’s worth noting that cars represented over half of vehicle sales in 2008 during the recession. Considering fuel prices remain elevated, consumers aren’t simply choosing to purchase the most fuel efficient vehicles, which can be interpreted as a sign of confidence that their disposable income is strong. Finally, truck sales are most likely being at least somewhat fueled by a recent uptick in construction activity, which is a great sign for the economy.
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Sources:
http://www.cnbc.com/id/101494774
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