The WMA Weekly Market Wrap v.180612

June 12, 2018

A Good Week

Domestic stocks recorded solid gains last week, with the Nasdaq and S&P MidCap 400 indexes reaching new peaks and the S&P 500 hitting its best level since early March. Despite setting a record – snapping its longest streak without a fresh high since 2016 – the tech-heavy Nasdaq lagged the other benchmarks due to declines late in the week. On a sector basis, consumer discretionary shares performed best within the S&P 500, while utilities stocks suffered substantial losses as long-term U.S. Treasury yields rose, making their relatively high dividend payments less attractive in comparison.

Traders suggested that the afterglow from the previous week’s strong employment and manufacturing data seemed to help the market move higher early in the week. Further good news arrived Tuesday, when several surveys indicated better-than-expected expansion in both the manufacturing and services sector. A sharp increase in mortgage applications, reported Wednesday morning, was also encouraging.

A decline in the U.S. dollar also boosted sentiment as a weak greenback boosts the competitive prospects of U.S. exporters and increases the value of profits earned overseas by U.S. companies in dollar terms. The dollar fell in particular against the euro as worries ebbed about Italy’s new government and speculation grew that the European Central Bank might soon announce a change in monetary policy.

The week’s market advance came despite continuing worries about heightened trade tensions and other international conflicts. Heading into this weekend’s meeting of the Group of Seven industrialized nations, President Trump signaled his intention to continue pursuing an aggressive trade agenda even at the expense of America’s standing in the world. For decades, the G-7 summit has been a venue for the richest countries to coordinate policies around trade and shared values, and the U.S. was the undisputed leader. Now, it appears that the Trump administration seems less interested in maintaining the post-World War II trading system and more concerned with domestic priorities (“America First”).

The immediate focus of the talks — which include Canada, France, Germany, Italy, Japan, the U.K. and the U.S. — will be the Trump administration’s decision to impose tariffs on steel and aluminum imports from fellow G-7 countries. Even before the meetings, the White House said that President Trump would leave the summit much earlier than planned, as the general dispute got hot quickly on Thursday over the U.S.’s trade stance between Mr. Trump and two of America’s closest allies: Canada and France. A relatively cordial start to the summit may have lifted sentiment on Friday afternoon, however. Uncertainty surrounding the June 12 summit between the U.S. and North Korea in Singapore may have also worried some.

Meanwhile, China hawks in Congress and in the administration lost a battle over ZTE when, despite lots of tough talk on China, the Trump administration announced a surprisingly soft deal Thursday to resuscitate the Chinese telecommunications giant, which many see as a major security threat, but they made it clear their war against Chinese tech companies is far from over. As noted above, U.S. Treasury yields ended modestly higher for the week after peaking Wednesday afternoon.

European equities finished last week lower as trade tensions once again rattled financial markets there on the eve of the G-7 summit. Following President Trump’s tweet that accused Canada and the European Union of having unfair trade barriers, most European equities headed lower. The German DAX, which holds several export-dependent companies, posted a loss of more than 1 percent by week’s close. The pan-European STOXX 600 Index and the UK’s blue-chip FTSE 100 Index each logged a decline of around 0.8 percent for the week. European traders remained worried about whether the U.S. would continue to levy tariffs on imported European steel and aluminum.

In Asia, Japanese stocks rallied, with the Nikkei 225 Stock Average advancing more than 2 percent for the week. China’s benchmark stock index fell for a third consecutive week as U.S. trade concerns and Beijing’s nationwide deleveraging campaign targeting debt-laden companies weighed on sentiment. For the week, the benchmark Shanghai Composite shed 0.3 percent. Friday marked the end of the first week of trading for the roughly 200 Chinese companies that joined MSCI’s global equity benchmarks on June 1. The addition of Chinese A shares to MSCI’s indexes — including its flagship Emerging Markets Index — was expected to attract large capital inflows into China, but the performance of Chinese stocks has proved disappointing this year. Through Friday’s close, the Shanghai Composite has fallen 7.2 percent YTD, while the CSI300 has shed 6.2 percent, according to Dow Jones.

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