Stock market investors have responded positively to Friday’s bold words from ECB President Mario Draghi that warned of downside risks to Eurozone inflation and pledged to use all tools available to maintain price stability.
By Peter Martin
Monday, August 25, 2014
European stock indices advanced on the resultant increased expectations for ECB stimulus, followed by rises on Wall Street that set new record highs. By early afternoon in New York, the Dow Jones Industrial Average had climbed 0.49% or 83 points to 17,084, while the S&P 500 made similar percentage gains to stand at 1997.8, after earlier breaking above the 2000 mark for the first time in its history.
The stock market was also boosted by further M&A activity, including news that Burger King has entered into negotiations to take over Canada’s largest coffee-shop chain Tim Hortons. The proposed tax-inversion deal would see any resultant company headquartered north of the border in Ontario, in order to benefit from lower corporate tax rates —Canada’s Federal corporate tax rate is 15% and Ontario’s provincial corporate tax rate is 11.5%, meaning a combined 26.5% as opposed to the US rate of 35%. Burger King Worldwide’s share price has surged close to 24% today.
Biotechnology company Intermune was another stock moving up rapidly, gaining 35% after Swiss pharmaceutical group Roche Holding announced it is set to purchase the company for $8.3 billion, the latest in a succession of big-money pharmaceutical acquisitions in 2014.
Macroeconomic news has been mixed today, with signs of growth in key areas of the economy, but at more moderate levels than in recent months. Markit’s flash reading for August of its services sector Purchasing Manager’s Index came in at 58.5, still well above the 50-mark that separates contraction from expansion, but down from the heady 61.0 reading seen in July.
It was a similar story with the Dallas Fed’s production index, a key gauge of manufacturing conditions in Texas, which fell back from July’s 19.1 to a reading of 6.8. This still indicates growth, but at a more subdued pace, a result also reflected in other manufacturing measures recorded by the Dallas Fed —the new orders index slumped 11 points to2.2, which will raise concerns about momentum, while capacity utilization and the shipments index also showed steep declines.
We saw a number of encouraging housing reports last week, but it was a slightly different story today with new homes sales, which dropped to an annual pace of 412,000 in July from June’s upwardly-revised 422,000. The weakness in this headline figure, which came in well below expectations, was offset to some degree by positive amendments to both May and June.
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