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Market in a Minute: Sept 3-6, 2019

Saturday, September 7, 2019

by Rich and Sheila Jamison

Executive Summary

Equities rose as the risk-on rally carried into a second straight week. The holiday-shortened week began lower on

Implementation of US/Chinese retaliatory tariffs

August’s ISM data showing our manufacturing sector in contraction for the first time since 2016

Stocks then rallied sharply over the next two days after

China agreed to meet in October for trade talks

Hong Kong withdrew its extradition bill

Odds of an imminent no-deal Brexit declined

Friday’s less-than-expected August jobs number tempered the rally. All 11 S&P sectors gained on the week. Consumer discretionary, energy and information technology each gained over 2.0%. Defensive-oriented utilities and healthcare were the laggards, each rising by less than 1.0%. 

Our 10-year Treasury yield rose to 1.55% (from 1.51%), slightly increasing the 2-year to 10-year spread. WTI crude oil rose to $55.45. Volatility fell to 15 from 18.8 according to the CBOE’s Volatility Index (VIX).

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Details

Trade

Chinese trade negotiators confirmed that "serious" ministerial talks will take place this month in preparation for face-to-face talks between US and Chinese trade officials in Washington in early October. Tensions remain high as further tariffs came into force on September 1 and an additional 5% US levy on Chinese imports is set for October 1. Markets welcomed the news nonetheless, which boosted risk appetites. The positive takeaway seems to be that the situation didn’t deteriorate further.

Economy

Solid growth in August’s non-manufacturing activity (the service sector) helped counter the lower manufacturing data and stave off recessionary fears.

The Labor Department’s August Employment Situation Report (less tongue twisting, the “August jobs report”) showed hiring activity slowed. Nonfarm payrolls rose by 130,000 (vs. 170,000 expected). Additionally, the prior two months were revised downward by 21,000. Only 3,000 jobs were added in the manufacturing sector. The unemployment rate held steady at 3.7%. Wages grew 3.2% compared with year-ago levels, slightly below their peak for this cycle. In short, fewer people were put to work at higher wages than had been expected, but more people are working than the month before.

Interest Rates

Several regional Fed presidents, including Boston's Eric Rosengren and Dallas' Robert Kaplan, publicly played down the need for further rate cuts. St. Louis Fed president James Bullard called for a larger-than-expected 50 basis point cut at the Fed's September meeting. Chair Powell reiterated only that the Fed is going to support the economy. 

Globally

The global manufacturing sector continues to sputter amid the ongoing trade tensions. Seventy-one percent of global manufacturing purchasing managers' indices are now below 50, indicating contraction in the sector.

Europe

The headline grabbing news from Europe was Prime Minister Boris Johnson losing control of the Brexit timetable. The British Parliament’s House of Commons passed a bill requiring Johnson to ask the European Union for an extension until January 31 if a deal is negotiated before October 19. At present, the UK is scheduled to exit the EU on October 31. Twenty-one members of his own Conservative Party voted in favor of the delay, prompting the PM to expel them from the party, losing his parliamentary majority in the process. Parliament subsequently thwarted Johnson's call for a new election as Labour Party members abstained from the vote, denying Johnson the two-thirds of the House of Commons needed to approve an election. The government may attempt to hold a vote on a prospective election again on Monday. Opposition parties have said they will not agree until after the late October EU summit, insuring the government will indeed ask for an extension. The net effect is that the ‘no-deal’ risk has receded in the short-term but the risk of a general election has increased.

Several central bankers pushed back against the need for aggressive additional easing of monetary policy last week. Members of the ECB's Governing Council from Germany, France, the Netherlands and Austria were among those downplaying the need for the European Central Bank to unveil a forceful package of additional easing measure at its meeting on Thursday. Markets had been led to expect a cut in the ECB's deposit rate (pushing it deeper into negative territory), beefed up forward guidance on keeping rates low and a resumption of asset purchases before opposition to some of those policies built this week. Additional asset purchases may be placed on hold because of the dissent from the group of Northern European officials.

German July factory orders fell 5.6% year-over-year. The government blamed international trade tensions and receding business confidence.

Asia

Hong Kong's chief executive, Carrie Lam, formally withdrew the controversial extradition bill that was the catalyst for months of protests, sometimes violent, in the region. Protests leaders called the move too little, too late and continued their call for universal suffrage and for an independent investigation of the conduct of the territory's police force.

 


Sources:
Bloomberg News; Briefing.com; BusinessWeek.com; CNBC’s Power Lunch & Squawk Box; Crain’s New York Business; Dol.gov; Dorsey-Wright Associates; MarketWatch.com; Markit.com; MFS research; Morningstar.com; NASDAQ; NYMEX.com; NYSE; Reuters.com; Standardandpoors.com; Streetinsider.com; The Associated Press; The Financial Times.com; The New York Times; The Wall Street Journal Online; Thomsonreuters.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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