Escalating trade tensions between the U.S. and China helped stocks to finish the week modestly lower. Bond yields fell to their lowest point in three years on volatility. An unexpected drop in China’s currency had global markets reacting widely. The drop in value was seen as a response to the recently announced tariffs on Chinese goods scheduled for September. Chinese investors were reassured as officials sought to explain that they don’t plan to embark on a currency devaluation campaign. Analysts believe that a form of an agreement or some compromise can be reached, but with no immediate time horizon. They say the head-to-head trade antics will likely continue to fuel volatility and pullbacks as things go forward. Overall, they say that the outlook is still positive based on economic expansion, modest rises in corporate profits, and low interest rates.
Familiar themes entered the picture again last week, with the current dust up in the U.S.-China trade battle and a significant drop in interest rates both working to move stocks lower. However, there’s no denying that both stocks and bonds have done well this year. As witness, just two weeks ago, the S&P 500 was at an all-time high, and bonds are on pace for their best year over all since 2002. That’s not to downplay the fact that the stock market just endured its worst day of the year on Monday. The Dow averaged intraday swings of 460 points during the week – a sign that anxiety is rising that things may be trending to a drop. There are three items to focus on as market volatility enters the scene:
- It’s unlikely that the current trade war will end anytime soon, but it’s also unlikely that the economy will tip as a result.
- Falling rates are a sign of the prevailing headwinds, but the yield curve isn’t a definitive sign of any expected trouble.
- Sizable swings and significant daily market drops are not indicative of the wider market action.
Trade fears have surfaced frequently along with worries over the yield curve/falling rates. But so far, the markets reacted similarly each time, pulling back before reconnecting to the greater fundamentals that set the course. The past instances may have caused the market to take periodic jogs off the main path, but not halt or reverse their momentum.
Metals and Mining
In bull-market runs, any price pullbacks are viewed as bargain-buying opportunities. That’s how gold ended on Friday. Early gains were lost, but buyers stepped in on the dip. Gold held steady just above the US$1,500 per ounce level. The metal saw its biggest weekly gain in more than three years, in a week when it broke through US$1,500 for the first time in six years. Gold is also seeing support from a down US dollar and the tepid stance on policy from the world’s central banks. The central banks of New Zealand, Thailand and India surprised markets as they all cut interest rates. In all, gold has risen 4.3 percent on the week and about 17 percent for the year. Geopolitical issues are also helping silver, which broke US$17 per ounce midweek. Silver’s rally positioned it to deliver a weekly gain of almost 5 percent. Palladium was up just under 1 percent on Friday, managing to stay within the US$1,400 per ounce range. It appears to be falling behind gold’s luster for the first time since late last year. Platinum remained relatively flat on the week after experiencing dips in the previous two sessions.
Energy and Oil
In its news this week, Saudi Arabia buoyed hopes with a promise to keep oil exports below 7 million bpd. But as markets go, the overall sentiment for oil appears to be very bearish. News from the IEA late in the week referred to global oil demand as “fragile” and characterized the global economy of showing signs of slowing. The agency said in its monthly report that, “The situation is becoming even more uncertain: the U.S.-China trade dispute remains unresolved and in September new tariffs are due to be imposed,”. Oil consumption declined in May by 160,000 bpd year-on-year. Between January and May, demand was up by a marginal 520,000 bpd. That’s the weakest increase since 2008. Overall, the agency cut global demand growth for 2019 to 1.1 mb/d. Natural gas spot prices fell at most locations this week. Henry Hub spot prices fell from $2.23 per million British thermal units (MMBtu) to $2.12/MMBtu. The New York Mercantile Exchange priced the September 2019 contract down 15¢, from $2.233/MMBtu last week to $2.083/MMBtu this week. The price of the 12-month strip averaging September 2019 through August 2020 futures contracts declined 12¢/MMBtu to $2.304/MMBtu.
Like the U.S. market, European stock markets ended the week lower thanks to elevated volatility. In general, stocks followed the trading patterns of global markets, with a steep drop on Monday based on news that China allowed the yuan to fall sharply against the U.S. dollar before recovering some losses within the week. The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, and the German DAX all posted significant losses. Wednesday’s data showed that German industrial output decreased 1.5% in June, a decline that was much larger than estimates. The disappointing industrial production number added to fears that trade conflicts could help drive Germany’s economy into recession. UK gross domestic product (GDP) shrank 0.2% in the second quarter. This surprised most analysts who had expected growth to go nearly unchanged. The quarterly drop was the first such contraction in seven years.
As would be expected, China stocks posted their largest weekly drop in three months, with traders preparing for a potentially long U.S.-China economic battle. For the week, the benchmark Shanghai Composite Index shed 3.2% and the large-cap CSI 300 Index fell 3.0%. Chinese technology shares were among the week’s biggest losers after Bloomberg reported late Thursday that the White House was delaying a decision about granting licenses to U.S. companies that applied to resume sales to Huawei Technologies. That Chinese telecom company is blacklisted in the U.S. based on espionage risk.
The Week Ahead
Second-quarter earnings season will slow down next week with less than 3% of companies in the S&P 500 reporting results. Important economic data to eye include the U.S. inflation numbers released Tuesday, retail sales coming out on Thursday, and the all-important consumer sentiment figures released Friday.
Key Topics to Watch
- Federal Budget on Monday
- NFIB Small Business Index report
- Q2 Household debt
- Import price index numbers
- Retail sales figures
- Philly Fed index
- Housing starts
- Consumer sentiment index
Markets Index Wrap Up