Stocks are on track to open higher, but a growing list of
geopolitical concerns are driving investor sentiment and market
action. The Iraq situation is grabbing headlines, but Russia
remains the primary worry for the markets.
The U.S. government's announcement of targeted air strikes in
Iraq adds to the uncertain geopolitical backdrop in which global
markets have been operating lately. The Sunni extremists who have
carved out a mini-state within Iraq and Syria have been steadily
adding to their space and resources lately, with most of the recent
gains coming largely at the expense of the supposedly better
trained and organized Kurdish Peshmerga forces. U.S. involvement in
the conflict will stall the extremist advance, but it's hard to
tell at this stage whether limited air raids will be enough to
dislodge them from their entrenched positions in and around Mosul,
the second largest city in Iraq.
More than Iraq, the immediate area of concern for global markets
is the face-off with Russia over Ukraine. Unconfirmed conciliator
comments coming out of Russia today have lifted investor sentiment
this morning, with European stocks and U.S. futures reversing
earlier losses. But this is a fundamentally unstable situation that
is extremely difficult, if not altogether impossible, for investors
Russia's recent moves in the region indicate that it remains
unwilling to tolerate an unfriendly unified Ukraine, and seems
prepared to play the long game. The issue is to what extent Europe,
particularly Germany, is willing and ready to confront Russia over
Ukraine, particularly with its own economic health in a weak state.
In corporate news this morning, McDonald's (
) came out with unusually weaker than expected July same-store
sales numbers. Sales were down across the world, but were notably
down in Asia, with comps in the region down a -7.3%. Part of the
Asian problem is the food-safety issue in China, which has been
problem for Yum Brands' (
) KFC chain as well. But the situation in the U.S. market is no
better, with comps down -2.5% relative to consensus estimates of
The company has faced challenges in the past as well, but these
lousy numbers raise the prospect of a more enduring structural
shift for the fast-food chain. Earnings estimates for McDonald's
have been steadily coming down in recent days, pushing the stock to
Zacks Rank #4 (Sell), but today's global comps numbers show that
they likely have more room to go.
Stocks and other risky assets don't do well in periods of
geopolitical uncertainty, and the current period is no different.
Uncertainty prompts investors to shun risky assets and take shelter
in defensive ones, like U.S. treasuries and German bunds. As a
result, yields on U.S. and German government bonds have been coming
down. The yield on 10-year German government bonds dropping to
1.02% at one stage today while 2-year German government bond yields
are in the negative - investors are paying the German government
for the privilege of owning its debt instrument.
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