Major U.S. Indexes Give Record Setting Performances

Charles Schwab: On the Market

Posted: 8/11/2016 4:15 PM ET

Major U.S. Indexes Give Record Setting Performances

U.S. stocks finished trading broadly higher as the Dow, S&P 500 and the Nasdaq Composite all registered record-high closes. Gains formed amid some upbeat earnings reports from the retail industry and as energy issues rallied with crude oil prices recovering from a two-day slide. Treasuries were lower, while domestic jobless claims and import prices both topped forecasts. The U.S. dollar was higher and gold was lower.

The Dow Jones Industrial Average (DJIA) increased 118 points (0.6%) to 18,613, the S&P 500 Index gained 10 points (0.5%) to 2,186 and the Nasdaq Composite added 24 points (0.5%) to 5,228. In moderate volume, 763 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.78 to $43.49 per barrel, wholesale gasoline was $0.06 higher at $1.36 per gallon and the Bloomberg gold spot price lost $9.45 to $1,337.16 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.89.

Macy's Inc. (M $40) reported 2Q earnings-per-share (EPS) ex-items of $0.54, above the $0.48 FactSet estimate, as revenues decreased 3.9% year-over-year (y/y) to $5.9 billion, north of the projected $5.8 billion. 2Q same-store sales decreased 2.0% y/y, versus the expected decline of 4.7%. M reaffirmed its full-year EPS and sales guidance, while also announcing a series of initiatives to "drive profitable growth" and enhance shareholder value. Shares finished sharply higher.

Kohl's Corp. (KSS $44) posted 2Q EPS ex-items of $1.22, above the forecasted $1.03, with revenues declining 2.0% y/y to $4.2 billion, roughly in line with expectations. 2Q same-store sales decreased 1.8% y/y, mostly in line with estimates. KSS lowered its full-year profit outlook but shares rallied.

Alibaba Group Holding Ltd. (BABA $92) traded decisively higher after China's largest e-commerce company topped the Street's quarterly earnings and revenue forecasts, bolstered by its cloud computing services.

Valeant Pharmaceuticals International Inc. (VRX $$24) fell following a report from the Wall Street Journal that stated the company is under criminal investigation for allegedly defrauding insurers over its ties to mail-order pharmacy, Philidor RX Services LLC. VRX commented by pointing out that it previously disclosed in October 2015 that the United States Attorney's Office for the Southern District of New York commenced an investigation involving the company and it has been fully cooperating with authorities throughout the investigation. The company added that, "We do not comment on rumors about investigations, and cannot comment on or speculate about the possible course of any ongoing investigation."

Jobless claims dip, import prices unexpectedly ticked higher

Weekly initial jobless claims (chart) dipped 1,000 to 266,000 last week, versus the Bloomberg estimate of a decline to 265,000, with the prior week's figure revised lower by 2,000 to 267,000. The four-week moving average rose by 3,000 to 262,750, while continuing claims increased 14,000 to 2,155,000, north of the estimated level of 2,133,000.

The Import Price Index (chart) ticked 0.1% higher month-over-month (m/m) for July, compared to projections of a 0.4% decrease and June's upwardly revised 0.6% gain. Compared to last year, prices were lower by 3.7%, versus the 4.3% forecasted drop, and following June's positively revised 4.7% fall.

Treasuries were lower with the yield on the 2-year note rising 6 basis points (bps) to 0.74%, the yield on the 10-year note gaining 7 bps to 1.56% and the 30-year bond rate increasing 5 bps to 2.28%. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

Tomorrow's U.S. economic calendar will culminate with a couple key reads on the all-important domestic consumer in the wake of today's upbeat earnings reports from the retail sector. Total July retail sales are expected to rise 0.4% m/m, capping off the fourth-straight monthly gain, while excluding autos, sales are forecasted to tick 0.1% higher after June's 0.7% jump. Stripping out autos and gas, sales are anticipated to grow 0.3% following the prior month's 0.7% increase. Also, the August preliminary University of Michigan Consumer Sentiment Index is projected to show consumer confidence improved to 91.5 from July's 90.0 level.

As noted in the recent Schwab Market Perspective: Is the Recent Rally for Real?, the healthy job market, which has helped move wages higher after years of stagnation, appears to be feeding into consumer confidence and retail sales. Read the whole perspective at www.schwab.com/marketinsight. Other U.S. reports slated for tomorrow include: the producer price index and business inventories.

Europe higher following earnings, Asia mixed ahead of China data

European equities traded to the upside, with earnings reports on both sides of the pond buoying sentiment, while energy stocks rebounded as crude oil prices regained some of the past two-day slide. For more on the global earnings landscape, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Earnings estimates are rebounding: what it means for stocks, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The Stoxx Europe 600 Index erased the sharp drop that ensued following the late-June vote in the U.K. to leave the European Union (EU), known as a Brexit. Pledges by central banks, notably the Bank of England, which last week cut its benchmark interest rate and surprisingly boosted its asset purchases, along with some relatively upbeat global economic data have helped ease concerns about the impact of the Brexit vote. For more, read Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two  at www.schwab.com/marketinsight. However, U.K. stocks lagged behind, led by property-related issues following a report from the Royal Institution of Chartered Surveyors that suggested Brexit is hurting housing market activity. The euro battled back to unchanged territory and the British pound was lower versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed, though volume was lighter than usual, with markets in Japan closed for a holiday and a host of Chinese economic data slated to be released overnight. Also, central bank action was in focus, with New Zealand cutting its benchmark interest rate by 25 bps to 2.00%, while South Korea left its monetary policy unchanged. The actions were expected and stocks trading in both countries ticked higher. Australian securities declined as the two-day losing streak for crude oil prices weighed on oil & gas issues and as financials also fell amid flared-up concerns about stressed assets of some of the nation's banks. Indian equities rose, possibly aided by the recent weakness in the U.S. dollar and eased Fed rate hike expectations, which have buoyed emerging markets.

Mainland Chinese stocks declined ahead of tonight's reads on industrial production, retail sales and fixed asset investment for July, while equities in Hong Kong gained ground, bolstered by optimism that the start date of the exchange link between Hong Kong and Shenzhen could soon be announced, per Bloomberg. Ahead of tonight's Chinese economic data, Schwab's Jeffrey Kleintop, CFA, offers in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, discusses 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational.

In addition to the aforementioned Chinese data, tomorrow's international economic docket will include the Wholesale Price Index, CPI and preliminary 2Q GDP from Germany, preliminary 2Q non-farm payrolls from France, industrial production and preliminary 2Q GDP for the Eurozone and construction output from the U.K.

Financial Review

Capping Off a Record Week

Sinclair Noe — July 22, 2016

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DOW + 53 = 18,570
SPX + 9 = 2175
NAS + 26 = 5100
10 Y – .02 – 1.55%
OIL – .51 – 44.24
GOLD – 8.60 = 1323.10

Stocks closed higher for the fourth straight week, with the S&P hitting a new record high. The rise capped the longest run of weekly gains since March. The Dow Industrial Average did not close at a record high but has been positive for 10 of the last 11 sessions.  A three-week rally in global equities has added more than $4.5 trillion in value.

The next big event for the markets likely will be the two-day Fed policy meeting slated for July 26-27. Although the central bank isn’t expected to push benchmark rates higher, market participants will pore over the updated policy statement for clues on the pace and timing of the next rate hike, which could influence the U.S. dollar, Treasuries and the broader stock market.

In the weeks following Brexit, there was a “dramatic deterioration,” in the British economy; that according to a one-time report from Markit Economics published this morning. Services and manufacturing shrank and a gauge of the private-sector economy plunged to 47.7, well below the 50 level that divides expansion from contraction. The slump is the strongest evidence yet that politics is propelling the world’s fifth largest economy into recession. It intensifies pressure on the Bank of England to deliver fresh monetary stimulus and on the government to reverse fiscal austerity.

The pound dropped after the report was published, with Markit saying its latest readings put the economy on course to contract by 0.4% this quarter. Business activity in the eurozone did not fall as much as expected in July, despite Brexit jitters and the Bastille Day massacre, as Markit’s flash PMI for the region dropped to 52.9 from June’s 53.1.

French President Francois Hollande has given U.K. Prime Minister Theresa May a choice: Accept unlimited immigration from the EU or lose access to its single market. May also confirmed that the triggering of Article 50 won’t come this year as her government works out its negotiating position. Article 50 refers to the official notification to withdraw from the Euro Union. And this is an important point because the UK is not officially out of the EU until it has triggered Article 50 and then gone through 2 years of negotiations. Now the UK could conduct negotiations during that period, but a big part of any new trade deals will be with countries in the EU. Bottom line, the Brits will have a very tough time getting trade deals in place before they exit the EU.

Finance ministers and central bank governors from G20 countries are gathering in Chengdu, China, for a two-day meeting that begins tomorrow. Brexit and monetary policy at a global level are likely to be the main topics of discussion. Ahead of the G20 meeting, the IMF painted a dark outlook for the global economy, issuing an “urgent” call for the world’s largest economies to roll out more growth-boosting policies and act more aggressively.

General Electric reported a sharp rise in adjusted net income in the second quarter, as its aviation, healthcare and power businesses countered weak demand for oil and gas and transportation equipment. During the quarter, GE returned $18 billion to shareholders through stock buybacks. The company shed its designation as a non-bank systemically important financial institution after divesting most of its GE Capital business. GE’s results included four different earnings-per-share numbers.

The conglomerate has said year-over-year comparisons are difficult as the company has recorded both gains and losses from sales of several businesses as part of its GE Capital exit plan, acquired Alstom and recognized pension costs and restructuring charges. The actual bottom line based on generally accepted accounting principles (GAAP) was earnings of $2.74 billion, or 30 cents a share, compared with a loss of $1.36 billion, or 13 cents a share, in the same period a year ago. GE shares dropped about 1.6%.

Boeing has revealed more expensive stumbles with the production of new commercial and military jets, saying it would take $2.1 billion in charges in its coming earnings. The pretax charges stem from delays in developing its new Air Force refueling tanker, demand concerns about its 747 jumbo and the original high costs of its 787 Dreamliner.

American Airlines reported better than forecast second-quarter earnings but profit fell even though the airline managed to cut fuel costs — a major expense — by one-fifth. Overall operating revenue is down, while the average airfare paid fell 6.4% and load factor — a measure of how full flights are — dropped one half percent. Earlier this week, United and Southwest both reported similar revenue pressures. Reduction in spending on the part of the airline and the consumers is a sign of a weakening global economy or, at the least, a sign that growing concern the global economy is headed that way. Britain’s historic vote to leave the EU, is one reason.

American Airlines President Scott Kirby said during the earnings call, “We have seen historically that if there is a business confidence problem, the first thing businesses do is cut entertainment and travel budgets.” In fact, for everyday consumers, air travel is also one of the first budgetary items to be cut when there is concern about the economy. As a result, softness in airline revenues and a decline in demand for air travel can be seen as a bellwether for looming economic issues.

Schlumberger and Halliburton, the world’s two largest providers of oilfield drilling and fracking services, have said that the worst of the two-year-old oil market crash may be over. The first half of the year has seen something of a pick-up in deals, while the backlog of drilling, but not fracked, wells in the U.S. has stopped growing. The one thing that is missing from the picture so far is a recovery in oil prices. WTI crude oil prices dropped about 3% this week.

Even though Schlumberger thinks the oil patch has hit bottom and may be turning around, they will cut more jobs. The world’s largest oil field services provider earned an adjusted $0.23 a share, topping estimates of $0.21. Revenue of $7.16 billion edged out the $7.15 billion that Wall Street was expecting. Schlumberger says it cut 16,000 jobs in the first half of the year, leading to a $646 million restructuring charge.

Meanwhile, the latest news from baker Hughes shows oil rig counts increased by 14 in the last week – up 6 of the last 7 weeks. So, as we look at rebalancing in the oil patch, $50 a barrel looks like the level where the rigs pump come out of hibernation. This week’s report from EIA revealed a slight draw-down in crude oil inventories. Crude oil stocks were down 2.3 million barrels, posting the ninth straight week of declines and adding momentum to a slow but steady oil market balancing. Still, oil inventories stood at 519.5 million barrels as of mid-July, about 60 million barrels higher than year-ago levels. Combined, all U.S. crude oil and refined product stocks jumped to 2.08 billion barrels, an all-time high. This comes at a time of year when peak demand is supposed to draw down on inventories.

There was some strong economic news this week, existing home sales were up, and it looks like first time buyers made up about one-third of all buyers last month.  The low interest rate environment is certainly a factor on home sales. It suggests that important cylinders of the US economic engine continue to fire, despite the slowdown in China and the weakness in Europe.

Aside from homes, cars—another interest-rate dependent sector—are going strong too. GM’s profit was up 150% when they reported earnings the other day. All those new cars are more efficient; they get better mileage, which might explain why we have an oil glut right now.  Refiners are contributing to the draw-down in crude oil stocks, pulling oil out of storage, but they are simply spinning that into gasoline, which then ends up in storage because people are not using as much as the industry thought it would. As summer comes to an end and refiners turn to maintenance and cutback on refining runs, the upward pressure on gasoline inventories could subside, but the demand on crude could also fall.

Automakers are betting big on electric cars, in part to meet aggressive U.S. fuel-economy standards that project the vehicle fleet will average more than 50 miles per gallon by 2025. And while the cars are efficient, they still have to charge up with electricity. The Energy Department has announced a plan to provide $4.5 billion in loan guarantees to build car charging stations, aiming to complete a U.S. network by 2020 to make “coast-to-coast, nationwide zero-emissions travel” a reality.

Stepping into the student loan marketplace, Amazon has formed a partnership with Wells Fargo, in which the bank will offer interest rate discounts to select “Prime Students.” The offer, which will shave a half percentage point off WFC’s student interest rates, will be accessible to Amazon shoppers who want loans to attend college and those who want to refinance existing loans.

Pokemon GO has finally launched in Japan, the birthplace of the little virtual monsters. Besides Nintendo, which owns stakes in both The Pokemon Company and game developer Niantic, shares of McDonald’s Holdings Japan are getting a big boost from the news. Its fast food restaurants across the country are set to become “gyms,” where players can train their Pokemon for virtual fights.

Financial Review

Milk and Cookies

Sinclair Noe — May 18, 2015

 

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DOW + 26 = 18,298.99 (record)
SPX + 6 = 2129.20 (record)
NAS + 30 =  5078
10 YR YLD + .09 = 2.23%
OIL – .14 = 59.55
GOLD + 2.30 = 1226.80
SILV + .19 = 17.78

Record high close for the S&P 500 and the Dow Jones Industrial Average. The rationale behind these record highs is suspect. Last week’s economic news was disappointing, and the bad news moved the markets higher, mainly on the idea that the Fed will be slower to raise rates. Retail sales were weak, industrial production was flat and capacity utilization decreased.

Consumers aren’t spending what’s left over after lower oil prices, instead, they are increasing personal savings. A new survey from Princeton Research shows 19% saved the difference from the gas pump, 4% invested, and only 14% took the savings from lower gas prices and went out and spent it on discretionary items such as dining out or vacations; while 40% spent the savings on necessities such as rent and groceries.  Lower oil prices were supposed to provide an economic boost; instead, it was the windfall that wasn’t.

And now it is long gone. Gas prices rose another 22 cents over the past three weeks to $2.82 per gallon, according to the latest Lundberg survey. The cost of regular gasoline has risen 32 of the past 34 days. And ISIS has just city the city of Ramadi, the provincial capital of Iraq’s largest region, about 75 miles from Baghdad. And Baghdad’s actions before and after the setback are raising red flags about the strategy to fight ISIS. Violence in the Middle East puts a floor under oil prices; it also makes for some strange coalitions. The US and Iran and even Saudi Arabia are on one side fighting against ISIS, even as they are on opposite sides in Yemen. And despite it all, the global oil market remains oversupplied. Crude oil inventories remain plentiful and stand some 86 million barrels higher than a year ago. Gas prices are still lower than they have been for this date since 2009. In fact, they’re down nearly a full dollar from a year ago.

Trying to estimate the cost of energy is likely a fool’s errand. The International Monetary Fund today issued a report saying the fossil fuel industry is subsidized to the tune of $5.3 trillion per year, largely due to polluters not paying the costs imposed on governments by the burning of coal, oil and gas. These include the harm caused to local populations by air pollution as well as to people across the globe affected by the floods, droughts and storms being driven by climate change.

The IMF report said that ending subsidies for fossil fuels would cut global carbon emissions by 20%. That would be a giant step towards taming global warming, an issue on which the world has made little progress to date. Ending the subsidies would also cut the number of premature deaths from outdoor air pollution by 50% – about 1.6 million lives a year. Furthermore, the IMF said the resources freed by ending fossil fuel subsidies could be an economic “game-changer” for many countries, by driving economic growth and poverty reduction through greater investment in infrastructure, health and education and also by cutting taxes that restrict growth.

Homebuilder sentiment fell in May but still showed more builders view market conditions as favorable. The National Association of Home Builders Index fell to 54 from 56 the month before. Readings above 50 indicate more builders view market conditions as favorable than poor. NAHB economist David Crowe said: “Consumers are exhibiting caution, and want to be on more stable financial footing before purchasing a home.”

The retail sector jumps into the spotlight this week with heavyweights Target, Home Depot, Lowe’s and Wal-Mart scheduled to report Q1 earnings. As we near the end of the earnings season, the S&P 500 revenue numbers show a decline of 3.7%. The P/Es of the SPY and QQQ are 21.4 and 22.8, respectively. And the forward numbers are also high, coming in at 17.8 and 19.3.

The dollar climbed from a four-month low on speculation reports this week will bolster the case for a Fed interest-rate increase. At a speech in Sweden this morning, Fed Bank of Chicago President Charles Evans repeated his call to hold interest rates near zero until early 2016. Evans, who votes on monetary policy this year, said borrowing costs should rise gradually thereafter because inflation is still well below the Fed’s goal.

Ann Inc. jumped 20 percent after Ascena Retail Group agreed to buy the women’s apparel retailer for about $2.2 billion. Altera has reportedly resumed talks with Intel about a potential buyout. Endo International has agreed to buy Par Pharmaceutical Holdings in a deal valued at $8.05 billion.

A U.S. appeals court reversed part of the $930 million verdict that Apple won in 2012 against Samsung. The Court upheld the patent infringement violations found by the jury. But the $382 million awarded for trade dress dilution will have to be reconsidered by the lower court. Trade dress is a legal term for a trademark on the way a product is packaged or presented. That wasn’t the reason Apple was leading the markets again today. Carl Icahn sent a new letter to Apple CEO Tim Cook. Icahn wrote: “Apple is poised to enter and in our view dominate two new categories (the television next year and the automobile by 2020) with a combined addressable market of $2.2 trillion.” He went on to write that Apple is grossly undervalued and should be worth $240 a share, not the current $130.19.

MasterCard is preparing for an antitrust complaint from European Union regulators probing card-payment fees. EU antitrust regulators have targeted swipe fees on credit-and debit-cards for more than a decade, warning that the way the charges are collectively agreed on is anti-competitive. Retailers have campaigned for years against interchange fees, saying that they push up the final costs of goods and services, and amount to a hidden charge on consumers. Card companies insist that the fees ensure that retailers make a fair contribution to the underlying costs of electronic payment systems. The EU has passed a law that would cap interchange fees on card payments and cut costs on such card transactions by $6.8 billion per year.

U.S. airlines expect to carry a record 222 million passengers this summer, up 4.5% from last year, Airlines for America says. The companies are increasing seating 4.6% to cope with the demand, which the trade group says is being boosted by improved employment and consumer sentiment. In Q1, 10 listed U.S. passenger airlines grew net profit 1.1% to $3.1B, helped by a 3.1% increase in revenues as the number of travelers rose 3.9%.

Gucci, Yves Saint Laurent and other luxury brands have sued Alibaba in Manhattan, alleging that the Chinese e-commerce giant has knowingly allowed the sale of counterfeit goods by merchants using its marketplaces. The brands are seeking a court order that would block the sale of the products along with damages that could include $2 per counterfeit item.

The art market hit a new milestone last week, with a record $2.7 billion sales frenzy and a single Picasso selling for $179.4 million, the highest price paid for any artwork at auction. And it seems especially pricey when you consider that you can get a cheap knock-off on Alibaba for a couple of bucks.

And apparently there is a correlation between record art sales and the stock market. According to a research note from Sundial Capital Research, finds: “previous bouts of expensive art sales have indicated over-confident conditions in the stock market as well. There is broad overlap between the markets, now more than ever. Wealth concentration is near an all-time high, and with stocks doing so well, it has helped to fuel massive confidence in other ‘greater fool’ markets like art. Like any trend in an unhinged market, it’s next to impossible to predict when the confidence will peak. Based on previous peaks, it could (should) be any time. The market is relatively isolated and a plateau in art prices wouldn’t have much effect on broader assets, though it would likely be coincident with a plateau in stock and bond markets.”

Wednesday, July 23, 2014 - Another Day Another Dollar

Financial Review with Sinclair Noe

DOW – 26 = 17,086
SPX + 3 = 1987
NAS + 17 = 4473
10 YR YLD un = 2.46%
OIL = 103.12
GOLD – 3.50 = 1305.00
SILV - .06 = 21.01

The Standard & Poor’s 500 index rose to an all-time high, as Apple boosted technology companies and health-care shares rallied through another busy day of earnings reports. The Dow was lower, mainly due to Boeing – we will get to that in a moment. Apple hit its highest level since 2012, based on earnings reported after the close yesterday.

Profits at S&P 500 members probably rose 6.2 percent in the second quarter, while sales gained 3.3 percent. Let’s knock out a few earnings reports:

Facebook posted $791 million in net income, or 30 cents a share compared with $333 million or 13 cents a share in the second quarter of 2013; revenue totaled $2.9 billion compared to $1.8 billion in the year ago period. Mobile advertising represented 62% of its ad revenue; they have figured out Facebook on a smartphone. Facebook now claims 1.32 billion monthly users.

AT&T was once the telephone company, now it’s the second largest US mobile provider; they earned  $3.6 billion or 68 cents per share in the second quarter, down from $3.8 billion or 71 cents per share a year ago; even as revenue increase from $32.1 billion to $32.6 billion.

Biogen Idec rallied 11 percent after raising its full-year forecast, while Intuitive Surgical jumped 18 percent as results topped estimates.

At first blush, Boeing’s numbers looked good; the aerospace giant earned $2.40 per share, easily beating estimates of $2 per share; the company lifted its earnings outlook for the rest of the year. Shares dropped about 2%. Revenue growth disappointed. Commercial airline sales were up less than expected; there was a substantial charge for a military tanker. Boeing is one of the dogs of the Dow – down 7% year to date.

Delta Air Lines said its second-quarter earnings were up 17%, driven by higher passenger and operating revenue as traffic increased. Delta has said it plans to reinvest about 50% of its operating cash flow back into the business, resulting in $2 billion to $3 billion of capital expenditures annually through 2018, with $2.3 billion planned for 2014.

Another day, another General Motors recall; the only difference is that today’s recall does not involve ignition switches; it is a problem with the seats. Today’s recalls total 717,950 vehicles covering six models; bring the total for the year to about 29 million. If you own a GM vehicle, call the dealer. The problem with ignition switches has not gone away, just today, it moved to Jeep-Chrysler, which announced nearly 800,000 vehicles would be recalled for ignition switch problems.

Another month, another downward revision from the IMF. In June, the International Monetary Fund forecast US economic growth would be about 3% to 3.5% for the rest of this year, and then they revised forecasts down to 2%. Today, the IMF said US economic growth would be about 1.7%. The IMF says lower growth expectations should contribute to continued slack in the labor market for the next three to four years, with the United States remaining below full employment until 2018.

The IMF says the Federal Reserve could keep its benchmark interest rates at zero beyond the middle of 2015, the date implied by policymaker forecasts, as long as inflation and financial stability concerns remain subdued. Future US growth could be disappointing if interest rates rise too quickly, or if there is a broader and concerted slowdown in emerging markets, or if increasing geopolitical tensions in Iraq and Ukraine prompt higher energy prices and severe financial and trade disruptions. The IMF also warned that an aging US population meant the economy would not be able to grow above 2% long term without significant reforms, including tax and immigration changes, more investment in infrastructure and job training, and the provision of childcare assistance, which could help lure more Americans into the workforce. Even without these measures, the IMF said there is "a strong case" for more government spending to support the economic recovery in the near-term, as long as there is a plan to deal with high entitlement spending later on.

Meanwhile, the IIF, the Institute of International Finance says investors have been willing to take on more risk, pushing borrowing costs down and stock prices higher, based in part on strengthening confidence in the US and global recoveries, but with perhaps too much exuberance. Investors do not seem to be taking adequate account of the uncertainties around economic growth and monetary policy, and that point to a pullback in markets. With uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation. The IIF’s concerns echo those of some Federal Reserve officials, who said at their June meeting that low volatility levels and increased risk-taking signaled “market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy.”

Another day and the fighting continue in the Middle East. The latest count has 687 Palestinians killed in the conflict. Ben Gurion Airport in Tel Aviv remains closed to US airlines, and many other global carriers. Secretary of State John Kerry is trying to negotiate a ceasefire but it looks unlikely.

In the Netherlands, a day of mourning as the bodies of the victims were returned for identification. Most of the passengers were Dutch. Two military planes, one Dutch and the other Australian, carrying the first 40 coffins landed at Eindhoven air base. They were met by members of the Dutch royal family, the Prime Minister and hundreds of victims' relatives. In Kiev, the Ukrainian government reports two Ukrainian military jets were shot down within 20 miles of the crash scene.

The downing of a civilian jetliner might turn out to be the Lusitania moment that could draw the US and Russia into a new world war, but for now, it does not seem likely. The more likely reaction will be an increase in sanctions against Russia, which the US has already done; the EU is more reticent. The European Commission, the EU’s executive arm, will put forward its proposals to a committee of the 28 EU member governments in Brussels tomorrow. The bloc’s foreign ministers this week called for plans for measures that could hit “access to capital markets, defense, dual-use goods, and sensitive technologies, including in the energy sector.” Russia supplies 30% of the natural gas to Europe, and it is a major trade partner. Yesterday, France delivered a $1 billion dollar warship to Russia, saying the Russians had paid for it and it was scheduled for delivery. Business drives the truck; coffins are placed in the back.

Events in Gaza and Ukraine have, for the time being, taken global attention away from the Syrian civil war and the ISIS’s advance through Iraq. Last Thursday and Friday were the two bloodiest days yet in Syria’s civil war, with more than 700 people killed in fighting between the Syrian government and ISIS, the Sunni militant group. An ISIS suicide bombing killed 31 people, mainly civilians, in Baghdad yesterday. ISIS appears to be consolidating its newly acquired territories. The government in Baghdad appears to be struggling to cobble together something that would actually pass as a government. The civil wars in Syria and Iraq are growing increasingly chaotic and there does not seem to be much hope for resolution.

The Gaza and Ukraine conflicts are not likely to draw greater powers into a major conflict. One reason is that Gaza and Ukraine are not major oil producers. The conflict that represents the largest potential threat to markets is still the ISIS invasion of Iraq; there oil supply could be severed and the jockeying among regional middle powers could possibly lead to a wider scale conflagration between Sunni and Shia sponsor states.

So, one of the indicators that things are getting better or worse will be reflected in the price of energy. Think of it this way: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. Anything that disrupts that supply of energy disrupts the work you do.

Right now, there is probably a $5 to $10 fear premium built into the price of oil, and that seems to be acceptable. The signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained more or less; Russia and Ukraine will find a solution or just fade away. The non-acceptance of Black Swans is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters. Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant. Maybe, after 13 years of war, the US is just weary of any threat.

At some point the fear premium could pop and oil prices could jump to $150 or $200 a barrel, and if that happens the IMF forecast is way too high; if that happens the economy comes to a grinding halt; if that happens, everybody in the US and Europe will wake up and scream bloody murder, but for now, it’s just another day, another dollar.