It was the worst week of the year so far for stocks. Worries about escalating trade tensions continue to be a factor in slowing global economic growth driven by President Trump’s announced 10% tariff on $300 billion worth of Chinese goods that will start this September. Oil stocks took a hit too as crude oil prices experienced their largest one-day drop since 2015. Oil did manage a partial recovery by week’s end. The big news which was highly anticipated, came as the Federal Reserve cut rates for the first time in a decade, based on an uncertain outlook, slower business investment, and inflation that remains in check. The Fed officials acknowledged strength in the labor market, still strong consumer spending, and moderate growth. The July jobs report confirmed that, and continues to add strength to the U.S. economy.
In a press conference after the rate announcement, the Fed chairman seemed to indicate that further rate cuts were unlikely this year. The Fed believes that the goal towards lower rates had been reached. The markets showed disapproval for the direction the Fed had taken by falling 1% the day of the press conference. And while the timing of future interest rate moves is unknown, most analysts think the economy is moving in the right direction. Three facts underscore this sentiment:
- Economic fundamentals are positive – as recent data shows that economic fundamentals, though slowing, are still a positive underpinning for the bull market. GDP growth slowed to 2.0% in the second quarter from 3.1% in the first quarter but was above the 1.8% consensus and in line with the average expansion pace.
- Job gains show the economy is headed in the right direction – the U.S. economy is still heading in the right direction. Friday’s jobs report solidified that fact. The number of jobs created in July decreased to 164,000 from the 193,000 in June but is well above the 110,000 that is needed to sustain the present growth rate for the economy.
- Trade tensions are not creating hurdles – last week’s escalation of trade tensions appeared to be already factored in. U.S. manufacturing, which accounts for 20% of the U.S. economy, has weakened over the course of the year as business investment and confidence has fallen off. Despite that fact, the broader market, including the much larger service-sector component of the economy, has so far been able to absorb rising trade tensions in stride.
By most analysts’ estimation, the real risk to a bull market is if the Fed raises interest rates too aggressively and dampens economic growth.
Metals and Mining
Gold struggled after the US Federal Reserve cut interest rates by a quarter point to a range of 2 to 2.25 percent on Wednesday. The news sparked a rally in the US dollar, which sent the precious metal downward. Gold regained some ground, but declined on Friday after gaining more than 2 percent in the previous session. Again, gold moves were triggered when US President Donald Trump threatened new tariffs on China. Despite the loss, gold appears to be on track for weekly gains. Many analysts believe that this down period for gold won’t last and feel it will continue to climb through the year. Silver experienced the same pressures as gold. The metal ended its rally from the two previous weeks in which it made gains close to 7 percent. Silver has managed to stay within the US$16 per ounce level. Palladium was down just over 1 percent on Friday, slipping out of the US$1,500 per ounce level to the US$1,300 per ounce level. Many market participants believe palladium will continue to rise, perhaps up to a further 3.6 percent in 2019.
Energy and Oil
Oil prices had its worst single-day performance in over four years. President Trump’s unexpected announcement that he would put a 10 percent tariff on $300 billion worth of Chinese imports sparked a selloff in equities and oil prices, which fell by 7 percent on Thursday. China said that it would retaliate if the tariffs go into effect. Trump has left idea that the U.S. could hold off on the table, but only if China offered concessions. The deep sell off on Thursday had traders buying on the dip Friday, giving oil a partial rebound. Oil continues to be a focus, but natural gas has also fallen off, despite hotter temps in the eastern U.S. Nymex prices for September delivery ended at $2.10/MMBtu on Friday. That was another multi-year low. European natural gas and LNG hit 10-year lows in June. Traders are concerned that storage could fill up by the end of summer in parts of Europe making for a rough August market.
European stock markets finished lower for the week. Following President Trump’s tweet expressing discontent about China’s purchases of U.S. agricultural products, markets fell Tuesday and again on Friday in response to the U.S. announcement of a new 10% tariffs on Chinese goods. The move reverberated financial markets. The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, German DAX, and Italy’s FTSE MIB Index reported significant losses. A plunge in the British pound, thanks to growing fears of a Brexit no-deal, capped an almost a 4% decline in July. On Thursday, the pound sterling dropped to levels below 1 pound per 1.21 U.S. dollar.
News of Trump’s tariff increase seemed to stun officials in Beijing. Likely because it fell just as U.S. and Chinese officials held two days of talks in Shanghai. Chinese shares slumped. For the week, the benchmark Shanghai Composite Index shed 2.6%, and the large-cap CSI 300 Index sank 2.9%. Both indexes fell more than 1% on Friday, in their reaction to the Trump announcement of the tariff hike while markets were closed in China.
The Week Ahead
Things are coming to an end for the current earnings season with about 13% of S&P 500 companies reporting in on second-quarter results. The economic news load will also lighten up as summer takes hold. Meaningful data this week will include releases of the ISM non-manufacturing index reported, wholesale inventory numbers and an update of inflation numbers released Friday.
Key Topics to Watch
– Markit services PMI (final)
– ISM nonmanufacturing index
– Consumer credit
– Weekly jobless claims
– Wholesale inventories
– Producer price index
Markets Index Wrap Up