Market in a Minute: June 17–21, 2019
by Rich and Sheila Jamison
Equities rose on hopes of looser monetary policy stimulating the global economy and news that presidents Trump and XI will meet at this week’s G20 summit. Reminiscent of what now seems like such a long time ago, some major stock indexes hit new record intra-day and/or closing highs. All 11 S&P 500 sectors finished in the green. Energy led the pack, up 5.2%, with seven sectors gaining at least 1.0%.
The US 10-year Treasury yield fell below 2% before ending at 2.07%. Lower rate expectations sent sovereign bond yields lower around the world.
A week ago, increasing US/Iran tensions only nudged oil’s price. Last week, WTI crude rose 9.2% to $57.37/barrel. Iran’s downing of a US military drone in international airspace near the Strait of Hormuz was the catalyst.
The Chicago Board Options Exchange Volatility Index (the VIX) showed a negligible change in volatility, 15.4 from 15.3 a week earlier.
A Tale of Two Markets
The S&P 500 hit a record high on prospects of a July Fed rate cut and hopes US/China trade talks at the G20 prevent additional tariffs. The stock market rally came despite clear signs from global government bond markets that growth is slowing. Equity markets are betting that the Fed and other central banks will be able to provide the stimulus needed to keep the global economic expansion intact. Record-low bond yields in Europe and near-record low yields in Japan suggest fixed income markets are skeptical of that narrative. Several Fed officials, including Fed Chair Powell, and European Central Bank President Draghi pointed to low inflation as a case for easier monetary policy. Our 10-year Treasury yield fell below 2% for the first time since 2016. It was over 3.25% last November. The breathtaking bond rally has pushed the tally of negative-yielding global debt to over $12.5 trillion.
The Fed didn't cut rates in its policy meeting last week – nor did the Bank of England or Bank of Japan – but the Fed did strike the dovish tone the market desired. It removed the word "patient" from its policy statement and noted that it will act as appropriate to sustain the economic expansion amid increased uncertainties. As of Friday’s close, the fed funds futures market showed a 100% implied likelihood of a rate cut at the end of July.
President Trump ordered retaliatory airstrikes against Iranian targets in response to Iran shooting down a US military drone near the Strait of Hormuz. He cancelled the strikes at the last minute, saying the damage inflicted would not have been proportional to shooting down an unmanned drone. Global oil prices rose in response to the escalating tensions, and a much international aviation is being diverted to avoid Iranian airspace.
Washington and Beijing each confirmed Presidents Trump and Xi Jinping will meet at the G-20 summit. While no breakthrough on trade is expected given the wide differences in negotiating positions, markets are hopeful that are that talks will be productive enough to forestall our imposing tariffs on an additional $300 billion in Chinese exports to the US.
South of the Border
Mexico became the first country to ratify NAFTA’s replacement, the US-Canada-Mexico agreement. Canada and the US have yet to ratify it.
Around the World
There was a confluence of central bank meetings last week, and most leaned dovish, with one exception. The US Fed set the stage for a late-July rate cut. At the annual European Central Bank forum in Portugal, outgoing ECB President Mario Draghi laid the groundwork for additional easing through rate cuts, additional quantitative easing and forward guidance. The Bank of England nominally retained its modest bias to hike rates if Brexit proceeds smoothly, though at the same time acknowledged increasing risks from Brexit and slowing global growth. The Bank of Japan kept policy unchanged but suggested it may allow 10-year Japanese government bond yields to fall below the previously targeted -0.2% threshold. Minutes of the Reserve Bank of Australia meeting noted that further easing is more likely than not. The lone hawkish outlier was Norway's Norges Bank, which raised rates to 1.25% from 1% and signaled continued gradual, cautious tightening. Norwegian inflation is running at 2.4% a year, above the central bank's 2% target.
Boris Johnson and Jeremy Hunt are the finalists in the next UK prime minister and Conservative Party leadership voting. Results are due July 22. Then, it’s back to Brexit.
German economic sentiment plunged in June on intensification of the US/China trade war, higher risks of a no-deal Brexit and increasing tensions in the Middle East.
Japan's exports fell for sixth straight month, down 7.8% year-over-year in May. Capital goods, auto parts and steel were the main drivers of the decline.
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.