US markets gained ground, despite geopolitical tension in Europe and signs of fading confidence levels at home.
By Kevin Loane
Wednesday, August 6, 2014
Both the S&P 500 (+0.21% to 1926.28) and the Dow Jones Industrial Average (+0.28% to 16,475.73) were up in choppy early morning trading as the major US indices slowly make up lost ground following last week’s 2%+ decline. Investors might have been expected to adopt a bearish tone as they digested the prospect of further conflict in eastern Ukraine, and Italy’s surprise return to recession during the second quarter.
The situation in eastern Europe has returned to the fore following heightened rhetoric from Poland and Russia. The Polish Foreign Minister, Radoslaw Sikorski, earned a strong rebuke from Moscow following provocative statements yesterday. Sikorski pointed to Russia’s recent build-up of troops along the Ukrainian border, noting ‘this is the sort of thing one does to exert pressure or to invade’. He was backed up by similar comments from his Prime Minister, Donald Tusk, who today said ‘the risk of a direct [Russian] intervention is higher than it was several days ago’.
According to NATO, the Ukrainian government has gained the upper hand in its battle against Pro-Russian separatists in the east of the country, leading to an increased number of Russian troops along its border. Market participants will be wary of any potential Moscow reinforcement, which may prolong the conflict and lead to increased bloodshed. Russia denied any looming intervention, lambasting talk of a troop build-up as Western propaganda. Separate news reports from Moscow suggested the Kremlin would soon retaliate to American and European sanctions imposed last week.
Markets were also considering the failure of several landmark M&A deals. Yesterday Fox announced an end to its potential $70+ billion takeover of Time Warner, citing Time Warner’s refusal ‘to deal with us’. Soon after, Sprint said that it would abandon its bid to acquire T-Mobile following pushback from US regulators. There were signs of fading confidence levels in Europe as well. Blackrock’s head of EMEA capital markets criticized the European IPO market, lamenting ‘the failure of companies to achieve stated financial and business targets even after one or two quarters’.
Amid rising geopolitical tension, and signs of market weariness, some investors fled to safety, pushing up the price of bonds and precious metals. The yield on the benchmark ten-year German bund declined to an all-time low of 1.11% in Europe this morning. Its US counterpart also performed well. The ten-year treasury was yielding 2.45%, down almost 15 basis points in the past week. Gold, the traditional safe haven, jumped $20 to $1310 while silver was up around 4% to $20.05.
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