Global equities resumed their upward march last week, reclaiming levels unattained since April, following the issuance of economic data from both the Eurozone and the United States, which largely exceeded expectations. The release of gross domestic product figures from Germany and France offered encouragement to investors as they revealed more favorable readings than analysts had forecast. Alexander Kraemer, an analyst at Commerzbank AG was quoted by Bloomberg News, “while not great in any way, German and French GDP numbers were better than expected, which adds to the scenario that there is no risk of an imminent euro break up. It shows that global growth is not collapsing, which also helps reduce investment risks.”
Following closely on the heels of the positive news from the Continent was a report of retail sales from the United States which surpassed expectations. In a sign that consumer spending may be on the rise, all of the major categories surveyed rose to post the largest increase in five months (New York Times). Adding to the optimism already present in the marketplace were better than expected readings on industrial production and consumer prices, as well as continued signs of stabilization from the labor and housing markets in the U.S. (Bloomberg News) released during the latter portion of last week.
The concern with which the Israeli government views the threat of the nation of Iran acquiring a nuclear weapon was on full display last week as a marked increase in bellicose rhetoric as well as highly publicized preparedness measures for its citizenry emanated from the country. Comments made by the Israeli Ambassador to the United States, Michael Oren, during a Bloomberg Government breakfast in Washington last Wednesday served to highlight the rapidly rising tensions. “Diplomacy hasn’t succeeded. We’ve come to a very critical juncture where important decisions have to be made.”
The distribution of gas masks to the public, as well as the testing of other civil defense measures last week accompanied the strong warnings from Mr. Oren and further revealed the precariousness of the situation. As the potential for a preemptive Israeli military strike continues to mount, and with it the possibility of a major disruption of the supply of crude oil to the global marketplace, the risk premium assigned by traders around the world to the per barrel price has contributed significantly to the twelve per cent rally seen since June, which if unabated will hold negative repercussions for the world economy.
As the data released last week continues to outpace expectations, the belief has grown within the marketplace that the economic improvement seen, although still only incremental, may reduce the chances of the Federal Reserve enacting additionally accommodative monetary policies in the near term. In a reflection of this growing sentiment among traders, prices of U.S. Treasury debt have moved significantly lower over the course of the last several weeks, sending yields, which rise when prices decline, to levels unseen since May as the bond market has begun to adjust to the changing environment.
Byron Wien, Vice Chairman of the Blackstone Group’s advisory services unit gave voice to an increasing belief among investors, in an interview with Bloomberg News, “housing is bottoming, gasoline is down from the beginning of the year. The European situation is getting better, not resolved, but getting better…there will be more good news than bad.”