Mostly Quiet, A Bit Higher
The major domestic stock market indexes were flat to slightly higher in light trading ahead of the Memorial Day weekend last week. The small-cap Russell 2000 Index lagged, reversing a recent stretch of outperformance that brought the benchmark to record highs. Energy shares performed worst within the S&P 500 Index, while utilities stocks recorded solid gains as longer-term bond yields fell, making their relatively high dividend yields more attractive in comparison.
The week was perhaps most notable for the plunge in oil prices and energy shares. On Monday, oil prices reached their highest level since late 2014 on speculation that the U.S. would impose new sanctions on Venezuela after the country’s leadership solidified its control in elections over the weekend widely regarded as corrpupt. Venezuela has the largest proven oil reserves in the world, although its production has been constrained by the country’s economic collapse.
Oil prices reversed course abruptly on Tuesday afternoon, however, following reports that OPEC was planning to increase production as early as June in order to prevent further price increases from destroying demand. Ironically, the threat of U.S. sanctions appeared to be partly at work in this case as well, with some speculating that OPEC was seeking to compensate for the loss of Iranian and Venezuelan supply. Supply fears gained further traction on Friday, when Russian Energy Minister Alexander Novak stated that “the moment is coming” to end a deal among major exporters to cut back on production that had been in place since the start of 2017. By the close of trading on Friday, the price of a barrel of domestic West Texas Intermediate oil had declined by nearly 7 percent from its Tuesday morning high.
Last week saw a number of other major geopolitical developments, but most seemed to have had only a temporary impact on the broader market. Treasury Secretary Steven Mnuchin provided a boost to sentiment to start the week by remarking that the trade war with China was “on hold” after progress in talks over the weekend. On Tuesday, stocks got another brief lift after China announced a reduction in tariffs on auto imports, but trade sentiment turned sour again on Wednesday after the Commerce Department announced that it was investigating whether auto imports were posing a threat to the U.S. industry.
President Trump’s decision to cancel the upcoming summit with North Korea sent stocks sharply lower in early trading Thursday, although the market later regained its footing. Worries over the fiscal policies of the incoming Italian government and the worsening debt problems in Turkey also periodically appeared to weigh on sentiment.
Conversely, stocks appeared to get a brief lift from the release Wednesday afternoon of the minutes from the Federal Reserve’s policy meeting early in the month. Policymakers emphasized the “symmetric objective” of their 2 percent inflation target, suggesting that a slightly higher rate of inflation would be acceptable. Traders also seemed to be encouraged that Fed officials appeared uncertain about how tight the link had become between a tightening labor market and higher inflation — a crucial question for Fed policy with the unemployment rate now at a nearly 18-year low of 3.9 percent. This dovish tone to the Fed minutes and growing demand for perceived “safe-haven” assets amid geopolitical uncertainty helped push longer-term U.S. Treasury yields substantially lower for the week.
Geopolitical uncertainty and soft economic data led to European stock market volatility during the week, as traders wrestled with the ever-changing developments regarding a possible summit between the U.S. and North Korea, as well as growing concerns about political issues in Italy, Spain, and the UK. The pan-European STOXX 600 Index posted a weekly loss, breaking its longest string of gains since mid-2014. The index had a notable late-week dip after President Trump called off the planned summit with North Korea’s Kim Jong-un. Stocks recovered somewhat after a measured response from Kim Jong-un that may have mollified some skittish investors.
The threat of new tariffs on U.S. auto imports further depressed markets during the week. Shares of European companies that make some of the top-selling cars in the U.S. tumbled on the news, and the STOXX Europe 600 Automobiles & Parts Index lost nearly 2 percent. Germany’s export-heavy DAX 30 also retreated for the week.
In Asia, China’s benchmark stock indexes posted their biggest weekly drops in a month, capping a week marked by geopolitical volatility after President Trump pulled out of the summit with North Korea and Sino-U.S. trade tensions remained on low boil. By Friday’s close in Shanghai, the blue chip CSI300 Index and the Shanghai Composite Index had given up 2.2 and 1.6 percent, respectively, marking the worst weekly decline for each since late April. Japanese stocks also traded off for the week. On Friday, China’s official news agency stated that U.S. Commerce Secretary Wilbur Ross will visit China in early June for more trade talks. News of Ross’s visit comes as the U.S. and China continued to exchange threats and concessions about trade.