U.S. markets are shifting their gaze homeward to focus on the Federal Open Market Committee announcement today at 2 pm. Treasury markets pulled back slightly yesterday but despite more volatility on the front of the curve, 30-year Treasury yields remain near multimonth lows. The hawkish tone taken by Federal Reserve Chair Janet Yellen in recent testimony on Capitol Hill, combined with improving employment data, has lead to a consensus view that a rate hike is on its way despite macroeconomic concerns abroad. At the moment 30-day Federal Funds Futures traded on the CME imply a roughly 50 percent chance of a rate hike in September. Critically, the futures curves for contracts linked to the benchmark rate demonstrates expectations for a gentle pace of tightening thereafter.
Chinese stocks post rebound. After four negative sessions, Chinese equities bounced back in trading today with the Shanghai Composite index closing up by nearly 3.5 percent. Despite the recent market swoon, the index retains gains of more than 70 percent in the trailing 12-month period.
GM makes big push in India. General Motors Co. today announced a multiyear plan to invest more than $1 billion into increased capacity in India to increase its market share on the subcontinent. As part of the program, the company will launch ten new domestically manufactured models tailored specifically for the Indian market.
Barclays reports increased profits. In a mixed earnings release today, London–headquartered financial institution Barclays revealed a 25 percent expansion of pretax profits in the first half of 2015 that was offset by a £850 million ($1.33 billion) provision for managing settlements. The bank also noted that recent cost-slashing efforts have been rewarded, as overall expenses for the year through June were reduced by 7 percent from the same period in 2014. Barclays also announced that it will abandon its dividend growth target.
German consumers sanguine on future income prospects. GfK consumer sentiment indexes for August remain strong. Today’s headline release registered at 10.1, slightly below the June reading, which came in at the highest level in more than a decade. A more detailed analysis of morale among German shoppers revealed greater confidence that future income will expand though there are misgivings about how much the Greek bailout will cost for the euro zone.
Chemical company merger unveiled. Belgian headquartered Solvay today announced a deal to acquire Woodland Park, New Jersey–based chemical manufacturer Cytec Industries, valuing the target company $6.4 billion. The $5.5 billion cash purchase, at $75.25 per share, will be financed through debt issuance and a rights issue as Solvay positions to take a greater portion of the North American market.
Portfolio Perspective: Dog Days of Summer — Tom Stringfellow, Frost Investment Advisors
The past few summer days have helped ease memories of a rough winter and the resulting tepid business activity earlier in the year. The passage of time has reenergized a few perspectives regarding the underlying strength of the economy.
Although investors’ appetites appear to be losing some steam, the economic backdrop continues to hint at a domestic economy still grinding ahead. Positive data for the week included bank loan growth; employment survey data and plummeting initial jobless claims; the leading indicators report; and a slate of corporate earnings which are still moving the needle toward a quarter not as bad as previously expected. There are still the obvious global worries that investors have yet to shake off — nor should they — including the growing economic malaise in China and whether this portends the next economic calamity or a contained tragedy. The downside to investor uncertainty is reflected in the cash holdings on the sidelines and the continuing drawdown in equity funds, off an additional $4 billion last week with about $77 billion withdrawn year-to-date.
With investor sentiment setting the stage for a future wall of worry yet to be surmounted, the second-quarter earnings season has progressed with domestic companies exceeding what were generally depressed estimates. Of the nearly 200 S&P 500 companies having reported thus far, roughly three-fourths have beaten the market consensus by an average of 4.6 percent. More than 60 percent of the S&P companies haven’t yet reported however; and there is still the spillover risk from the commodity price slump, continued U.S. dollar strength and the more recent sluggish capex trends. This week’s reports will add more flavor to market sentiment as will the scheduled economic reports, including consumer confidence trends, pending home sales and a first look at initial GDP estimates. Perhaps it will be just enough to move the markets out of the July doldrums.
Tom Stringfellow is president and CIO of Frost Investment Advisors, an asset management firm in San Antonio, Texas.
