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Market in a Minute: July 1–5, 2019

Monday, July 8, 2019

by Rich and Sheila Jamison

Executive Summary

Equities opened July strong on word of the preceding weekend’s US/China trade war truce. They faded after that but came roaring back to set records ahead of the holiday. They faded again Friday as a “too-good” jobs number made investors less certain about a Fed July rate cut. Still, the week ended with solid gain and all three major indexes set new closing highs en route.

Interest rates ran on their own roller coaster. The 10-year US Treasury yield dipped to 1.95% on Wednesday – the lowest it’s been since 2016 – then rallied on Friday’s equity dip to end the week at 2.05%.

WTI crude oil ticked down to $57.73/barrel on fears of a worldwide economic slowdown and a smaller-than-expected US supply drawdown. Russia and Saudi Arabia agreed to extend production cuts for another 6-9 months.

Volatility was lower, the VIX (CBOE’s Volatility Index) ending at 13.4 from 15.2 a week ago.

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Details

Trade & Economics

Presidents Trump/Xi’s meeting during the prior weekend sparked a strong opening on Monday. Without any concrete steps toward a trade deal, markets were pleased by the lack of further escalation. Trump also postponed additional tariffs on Chinese imports and relaxed restrictions on sales to Huawei. White House trade adviser Peter Navarro, a China trade hawk, says talks with China are headed in a good direction but notes that it is a very complicated process and a potential deal is still a long way off.

Monday’s initial euphoria faded once the market received more weak economic data, from both here and abroad. US manufacturing data showed a slowdown in activity though the sector remains in expansion. The June manufacturing PMI showed us slipping to 51.7 from 52.1 in May.

Data from Europe and Asia was worse than ours:

June’s Eurozone manufacturing PMI slipped to 47.6 from 47.7

Germany's Factory Orders in May fell 2.2% from April

China's June Manufacturing PMI held steady … but, at 49.7, it’s still in contraction

Japan's Manufacturing PMI slipped to 49.3 from 49.5

June South Korean exports decreased 13.5% from the prior year

Jobs, the Fed & Interest Rates

June’s monthly job report came in on Friday well above expectations at 224,000, spurring a rough day in the markets. It cast some doubt on the Fed’s expected July rate cut. While markets still expect a 25 basis point cut (fed funds futures show 100% probability), the likelihood of a more aggressive 50 bp cut fell to 4.9% from 32.3% a week ago.

Trump announced he intends to nominate two new members to the Federal Reserve Board of Governors:

Judy Shelton, an economist who is currently US executive director at the European Bank for Reconstruction and Development. Shelton has been a noted Fed critic and has advocated for lower interest rates.

Christopher Waller, the director of research at the Federal Reserve Bank of St. Louis. Waller is an advocate of central bank independence.

Meanwhile, European leaders nominated IMF Managing Director Christine Lagarde to succeed Mario Draghi as the president of the European Central Bank. Her nomination supercharged expectations for more easing by global central banks to accommodate weak global economic data. This drove European yields lower, expecting that Lagarde will maintain the ECB's expansive monetary policy. Lagarde is expected to be very dovish based on the IMF being a vocal supporter of negative interest rates during her tenure at the fund.

To round out our world tour of interest rates, the Reserve Bank of Australia lowered interest rates for the second consecutive meeting. It cut its official cash rate to 1% from 1.25%, a record low, in response to rising unemployment, a slowing economy and uncertainties surrounding global trade. Australia's economy is growing at its slowest pace since the immediate aftermath of the global financial crisis.

Non-US/China Trade Disputes

The US and China are not the only countries currently engaged in trade battles. Years-old tensions between Japan and South Korea prompted the opening of a fresh trade war front as Japan imposed export controls on the sale of materials vital to South Korea's electronics industry. The dispute follows a ruling by the South Korean Supreme Court that a Japanese steel company must compensate Koreans for forced labor during the period leading up to World War II, when Korea was colonized by Japan.

Notable Events

Stock buybacks slowed in Q1 for the first time in seven quarters. S&P 500 Index companies bought back $205.8 billion in Q1, down from a record $223 billion in Q4. Buybacks have been the biggest source of demand for stocks, more than twice that of the second biggest demand source, ETFs. Continued buybacks slowing could become a headwind for the market. 

After weeks of peaceful protest, Hong Kong protests took a violent turn when protestors stormed and ransacked the territory's legislative chamber. Participants are protesting against a law that would allow the territory's government to extradite people charged with certain crimes to China. The escalation caused China to hint that it could intervene in Hong Kong, calling the violent protest a direct challenge to Beijing's authority. With sensitive trade talks with the US underway, criticism from Washington on the matter has been muted.

 


Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Reuters.com; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com;
 
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

 

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