[dropcap]S[/dropcap]igns of continued economic stagnation and fears that Spain will delay a bailout pushed stocks lower and Treasuries higher. Madrid announced new austerity measures, but its bond yields rose when Prime Minister Rajoy said he would only ask for a bailout if borrowing costs remained “too high, too long”. Q2 US GDP growth was revised down from 1.7% to 1.3%, but the July Case-Shiller home price index rose 1.2%, above expectations. The price of gold was little changed. Oil dropped about 1%. For the quarter, the total return of the S&P 500 was just over 6%.
S&P 500: 1,441 (-1.3%)
MSCI EAFE: (-2.8%)
US 10 Year Treasury Yield: 1.63% (-0.12%)
Gold: $1,771 (-0.1%)
USD/EUR: $1.285 (-1.0%)
• Monday – Apple announced sales of 5 million iPhone 5s over the weekend. The result was lower than expected due to supply constraints.
• Monday – German Chancellor Merkel and French President Hollande publically disagreed about the timetable for beginning joint oversight of European banks.
• Tuesday – The Case-Shiller home price index for July showed a 1.2% year over year increase.
• Wednesday – August sales of new homes fell 0.3% from July, but the median price was 17% higher than a year ago.
• Wednesday – Spanish Prime Minister Rajoy indicated Spain will enact austerity measures but will not seek an immediate bailout. European stocks fell.
• Thursday – Israeli Prime Minister Benjamin Netanyahu pressed for a “red line” on Iranian uranium enrichment in a speech to the UN.
• Thursday – US Q2 GDP growth was revised down from 1.7% to 1.3%
• Friday – Apple CEO Tim Cook apologized for quality issues with the maps feature included in new iPhones.
• Friday – Spanish banks showed a capital shortfall of 59 billion euros, less than many had feared.
Israeli Prime Minister Benjamin Netanyahu this week gave a dramatic speech at the UN General Assembly. It was highlighted by a cartoonish visual of a bomb with a lit fuse. He said that, “by next spring, at most next summer, at current enrichment rates, they will have finished the medium enrichment and moved on to the final stage. From there it’s only a few months, possibly a few weeks, before they get enough enriched uranium for the first bomb.”
This was the most specific timeline so far laid out by a high-level Israeli or US official regarding Iran’s nuclear capabilities. Netanyahu pressed the international community and the US in particular, to draw an explicit “red line” on enrichment that would justify military action if crossed.
While it was a strong stance, the speech implied Israel will not attack before the end of the year and almost certainly not before the US elections, as some had anticipated. Still, it was a clear demonstration that the issue will become more prominent in the coming months and quarters.
So far this year, a lack of drama surrounding Iran has been one factor allowing global stocks to rise. As with all important issues boasting unknown outcomes, there is both upside and downside risk to stocks. Nevertheless, we expect volatility in the markets will increase as we progress along Mr. Netanyahu’s new timeline.