Rate snapshot: Geopolitics dominates markets

by MPA21 Jul 2014

Geopolitical issues are dominant this morning within markets.
Over the weekend Pres. Obama accused Russia of providing the missile that shot down the Malaysian passenger plane. Russian separatists have impeded rescue workers and investigators from doing their jobs and reports that the crash scene has been contaminated by the same separatists; so far nothing from the Black Boxes that are thought to be in separatists’ hands. In Israel fighting is increasing with Israeli troops continuing their ground assault. Ion the background, and with little news, the Iraq Sunni/Shiite confrontation is ongoing. Until now the US has led the sanctions against Russia as Europe has been dragging back because of the direct impact additional sanctions will have on the already soft European economies. The sanctions imposed so far have been narrowly targeted and haven't applied to broad swaths of the Russian economy.  Ukraine is ready to hand over the investigation of the Malaysia Airlines Flight 17 disaster to Dutch authorities.
Meanwhile, fighting in eastern Ukraine appeared to be intensifying. Putin attempting to take the high road; asking for more international investigation of the crash site and said that "Russia will do everything possible to shift the current conflict in the east of Ukraine from today's current military stage to the state of discussion at the negotiation table." The Obama administration for the first time publicly charged Mr. Putin's government with supplying the rebels the long-range rockets used in last Thursday's strike and also likely providing the separatists with training. European Union foreign ministers meeting in Brussels tomorrow will consider tougher sanctions on Russian individuals and companies.
There are no economic releases scheduled today; this week has June existing and new home sales and June durable goods orders as headliners. The week also has a huge number of key Q2 earnings reports due. Between the data and the geopolitical events in Israel and Ukraine, markets will likely be jittery; reacting to unfolding news about sanctions by Europe and earnings reports. Looking ahead, the FOMC will meet next week on Tuesday and Wednesday; expect more of the same from the meeting, however one can never underestimate what comes out of it. There is no Yellen press conference after the meeting. Also next week; the July employment report is on the schedule, in the past when the first Friday of the month fell on the 1st of the month the employment report was delayed until the second Friday. Finally next week Treasury will auction 2s, 5s and 7 yr notes.  With all that next week, this week isn’t likely to see much change in rates or the stock market.
US interest rates (10s and 30s) are at the lowest rates since last May and also since June of 2013. The events in the next two weeks will test whether investors will buy treasuries to push rates into new lows, breaking the June 2013 low on the 10 yr. Some history; the lowest the 10 yr yield came in August 2012 at the height of the Fed’s QE at 1.50%. There is very little likelihood based on current conditions that rates will get that low again. 2.44% close last May is a difficult challenge.
The DJIA opened at 9:30 -78, NASDAQ -13, S&P -6; 10 yr 2.47% -1 bp and 30 yr MBS prices 11 bps from Friday’s closes.
This Week’s Calendar:
            8:30 am June CPI (+0.3%, ex food and energy +0.2%)
            9:00 am May FHFA housing price index (+0.3%, April 0.0%)
           10:00 am June existing home sales (4.99 mil +2.0%)
           7:00 am weekly MBA mortgage applications
           8:30 weekly jobless claims (+8K to 310K)
           10:00 am June new home sales (475K -5.75%)
           8:30 June durable goods orders (+0.5%, ex transportation orders +0.7%)
The events in Ukraine and Israel are dominant today in financial markets. A lot of Q2 earnings and two data points will also get attention this week. Still depends on how investors and traders treat the geopolitical events that will dictate the interest rate markets. If stocks improve on earnings this week the rate markets will not likely improve much regardless of international events. A stock market improvement  would be a vote that those geo-political circumstances will not impede US economic improvement, thus keeping interest rates from increasing. Keep in mind many Fed officials have been speaking about an earlier increase in rates by the Fed than what is now expected. All of our technical studies remain bullish, but it is a thin line.


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