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Markets Down as Violence in Iraq Escalates

Market Digest – Week Ending 6/13

Stock indexes failed to extend new highs this week, but finished with only modest declines. In a deviation from the trend, small cap stocks slightly outperformed even as stocks fell. This was likely driven by an uptick in M&A activity. Economic and political news was negative on balance. The World Bank cut global growth forecasts from 3.2% to 2.8% and jobless claims were modestly higher than expected. Increased violence and reduced stability in Iraq drove oil prices higher and added to investor concerns. Meanwhile, the surprise defeat of House Majority leader Eric Cantor in a primary election makes it more likely the government relapses into an inability to compromise and manage debt issues.

Weekly Returns:

S&P 500: 1,936 (-0.7%)
FTSE All-World ex-US: (-0.3%)
US 10 Year Treasury Yield: 2.60% (+0.01%)
Gold: $1,277 (+1.9%)
USD/EUR: $1.354 (-0.7%)

Major Events:   

  • Monday – Tyson beat out a bid by rival Pilgrim’s Pride to acquire Hillshire Brands with a $7.7 billion offer.
  • Tuesday – House Majority leader Eric Cantor surprisingly lost a primary election to a Tea Party candidate.
  • Wednesday – The World Bank cut its forecast for global economic growth from 3.2% to 2.8%.
  • Thursday – Escalating violence in Iraq led to higher oil prices and selling of stocks after it was announced that Islamic militants seized key cities.
  • Friday – Iraq’s Shiite leaders called on their followers Friday to pick up weapons and join the government’s fight against Sunni militants who have closed in on the capital Baghdad.

Our take:

The situation in Iraq is quite bad, and has the potential to impact energy prices and global capital markets. Islamic militants have captured Mosul, Iraq’s second largest city, and are advancing toward Baghdad, though it is unclear if they intend to attack the capital city. Iran has come to the aid of Iraq, sending Revolutionary Guard units, and Iraq has asked the US for air support.

President Obama Friday made comments indicating the US may become involved militarily, but said he is not considering sending ground troops. The conflict within Iraq is largely sectarian, and therefore Saudi Arabia will also be keenly interested. Geopolitics in the Middle East is perhaps more difficult to predict than the stock market. Unfortunately they may start to impact each other yet again.

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