The WMA Weekly Market Wrap v.180626

June 26, 2018

More Trade-Offs

The major domestic equity benchmarks closed flat to lower last week. The narrowly focused Dow performed worst, hurt by its focus on industrial firms and exporters as trade conflicts deepened. The tech-focused Nasdaq fared better and reached a new record high at midweek, as did the small-cap Russell 2000. Within the S&P 500, the real estate and utilities segments outperformed, aided by a decline in long-term bond yields, which make their relatively high dividend payments more attractive in comparison. Industrials performed worst due to the trade worries, dragged lower in particular by leading exporters Boeing and Caterpillar.

On Tuesday, stocks opened sharply lower after President Trump directed his administration to draw up a list of tariffs on another $200 billion of Chinese goods, and a Chinese Commerce Ministry official warned that the country would respond in kind. On Thursday, stocks slumped again after German automaker Daimler (maker of Mercedes) lowered its outlook, citing the likelihood of lower sales for SUVs that the company makes in the U.S. and exports to China. After earlier suggesting that it might cut its tariffs on auto imports, China has recently threatened to increase them in response to the latest U.S. trade volleys. On Friday, President Trump further clouded the outlook for Daimler and other European automakers by warning that the U.S. would place 20 percent tariffs on auto imports from the EU if it did not lower its own barriers.

The energy sector was particularly volatile last week, falling through Thursday before rallying on Friday after OPEC ministers meeting in Vienna announced a smaller-than-expected increase in oil production. Consumer discretionary stocks also reacted to some notable developments. Media shares rallied after Disney sweetened its offer for most of the assets of 21st Century Fox, while Amazon and other major online retailers fell following a Supreme Court decision granting states the right to tax online sales by out-of-state firms.

Some disappointing economic data also appeared to be a drag on stocks. Traders pointed in particular to weaker-than-expected building permits and existing home sales, as well as a slowdown in a gauge of regional manufacturing activity. The labor market remained in solid shape, however, with weekly jobless claims hovering near levels last reached in the early 1970s, when the labor market was just over half of its current size. Yields on the benchmark 10-year U.S. Treasury note closed last week roughly unchanged.

In a volatile week for European equities, most of the major indexes closed lower. The pan-European STOXX 600 Index fell by about 2 percent, with most of the losses coming midweek, when automobile, mining, and tech stocks led the index lower. Also losing ground was the exporter-heavy German DAX 30. As in the U.S., escalating trade tensions between the U.S. and Europe were key. Certain U.S. goods, including bourbon, cranberries, and Harley-Davidson motorcycles were among the €2.8 billion ($3.2 billion) worth of products that will now carry tariffs. The move came in response to new U.S. tariffs on European aluminum and steel. Trade tensions weighed on mining and tech stocks, along with auto shares.

In Asia, China’s benchmark stock index ended the week on the verge of a bear market — commonly defined as a drop of at least 20 percent from its high — as trade pressures were the key driver there too. China’s state-run media called U.S. protectionism a “symptom of paranoid delusions” and said that U.S. measures to penalize China would ultimately backfire on U.S. workers. For the week, the benchmark Shanghai Composite Index shed 4.4 percent and the large-cap CSI300 Index fell 3.8 percent, marking the worst week for both gauges since February. Friday’s weekly drop pushed the Shanghai index down 19 percent from its latest high in January. Japanese stocks fell too, if not as precipitously.

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