It appeared that stocks would finish the week higher Friday until China unveiled a new round of retaliatory tariffs. That was met with a swift reply by President Trump vowing to respond, which sent things reeling. As trade tensions escalated, China announced that it will impose tariffs ranging from 5% to 10% on $75 billion U.S. goods in two batches on Sept. 1 and Dec. 15. That was punctuated with a 25% tariff on U.S. automobiles. Fed Chair Powell meeting at the annual central bank summit in Jackson Hole, Wyoming, left the option for another rate cut on the table, likely when the committee meets next month. That’s in answer to the risks to global and U.S. growth created by ongoing trade uncertainty. The Fed and trade lead the media buzz, however the economic and corporate data continue to be positive. Earnings reports from several high-profile retailers last week were solid, demonstrating that consumer strength, which is the main driver of the U.S. economy, remains intact.
The U.S. economic numbers seem to outweigh current concerns. The weekly jobless claims fell to their second-lowest level in the past four months last week. Alongside that news, wages have now grown above 3% for 12 consecutive months which is the longest such continuous streak since 2007. The unemployment rate is also down to 3.7% from 4% at the beginning of the year and nearing the 50-year low. It seems that the recession signal from the inverted yield curve is getting a lot of traction, but in reality, it’s household spending that will rule the future outlook. Over the past four U.S. recessions, unemployment rose by a minimum of 0.5% before each recession began, which indicated deteriorating consumer conditions. That is not on the U.S. economic radar at present.
Analysts believe that the Fed will lower rates, even if not as aggressively as the market seems to be anticipating. Economic data suggests moderate cuts may be appropriate to support a softening in growth. But as the Fed incorporates trade risks in its response, it could get more aggressive in rate cuts. Policy easing from the Fed is a supportive factor for the stock market and could be an additional catalyst for near-term swings in both interest rates and stock prices.
Metals and Mining
Gold prices were making gains of over $24 an ounce in late-morning trading Friday after the U.S.-China trade war kicked into a higher gear based on China’s newly announced trade tariffs on U.S. goods followed by Trump’ s retaliation in a series of threatening tweets – even going so far as to demand that U.S. businesses find ways to stop doing business with China. Trump also tweeted about who remains the bigger enemy: China’s President Xi or the Federal Reserve? That certainly helped to unnerve the marketplace heading into the weekend, all of which is bullish for the safe-haven gold mentality. As of the week’s end, December gold was last up $23.60 at $1,532.10. Silver was up slightly on Friday, still holding strong above the US$17 per ounce level. Silver continues to be supported by interest from investors thanks to the same concerns about the state of the US economy and ongoing geopolitical issues. Analysts suggest that Silver’s recent rally could lend credence to the theory that it will outperform gold in the not so distant future. Platinum was relatively flat on the week and is still unable to break through the important US$900 per ounce level. For its part, palladium was down close to 2 percent on Friday, and continues to trade below the gold. That’s not to say there are still many market participants in palladium’s corner. Metals Focus for instance, has stated that it believes the metal will continue to rise, forecasting that autocatalyst demand will more than likely go up by 3.6 percent in 2019, setting records at 8.59 million ounces due to tighter emission standards. As of 10:18 a.m. EDT Friday, palladium was trading at US$1,444 per ounce.
Energy and Oil
Oil plunged on Friday after the China announcement on new tariffs on U.S. goods, which included crude oil. The move reignited fears of economic recession. That focused all eyes on the Jackson Hole symposium, an elite financial summit that could give some insight into the U.S. Federal Reserve thinking. U.S. State Department special representative for Iran, Brian Hook, said that Iran’s oil exports have plunged below 100,000 bpd, although independent assessments from S&P Global Platts puts the figure closer to 450,000 bpd.
Natural gas spot prices rose at most locations this week with Henry Hub spot prices rising from $2.15 per million British thermal units (MMBtu) last Wednesday to $2.25/MMBtu this week. The Nymex price of the September 2019 contract increased 3¢, from $2.143/MMBtu last Wednesday to $2.170/MMBtu this week. The price of the 12-month strip averaging September 2019 through August 2020 futures contracts climbed 1¢/MMBtu to $2.329/MMBtu. Net injections to working gas totaled 59 billion cubic feet (Bcf) for the week ending August 16. As a side note, natural gas prices in Europe fell to a 10-year low as cheap LNG washes over the continent. Gas storage in many European countries is significantly higher than the five-year average.
Most major European markets rose throughout the week but continued under pressure after the new spurt of U.S. and China tariffs threats. The pan-European STOXX Europe 600 Index, the German DAX, and Italy’s FTSE MIB Index all rose, while the UK’s FTSE 100 Index dropped. The European Central Bank signaled Thursday that a stimulus package to address the region’s slowdown may be about to land. Signs that Germany may be entering a recession seemed to stack up during the week. The IHS Purchasing Managers’ Index showed orders at German factories and services companies dropped at the fastest pace in six years, and companies expect output to fall in the next 12 months. The German economy contracted 0.1% for the three months ended June 30.
As might be expected, Chinese stocks advanced as positive corporate earnings reports and monetary policy changes buoyed investor sentiment and helped to offset U.S. trade-related concerns. For the week, the benchmark Shanghai Composite Index added 2.6%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, rose 3.0%. The news issued on Friday helped push the markets over the edge as they ended the biggest weekly gain for both indices since June.
The Week Ahead
Outside of trade battle news, this will be a relatively light week for reporting as the summer holiday season winds to a close. Key economic data due for release in the U.S. include durable goods orders, core capex orders, consumer spending, core inflation, a revised second-quarter GDP report on Thursday, and the important consumer confidence index on Friday.
- Key Topics to Watch
- Durable goods orders
- Core capex orders
- Consumer confidence index
- GDP revision
- Personal income
- Consumer spending
- Core inflation
- Consumer sentiment index
Markets Index Wrap Up