The WMA Weekly Market Wrap v. 180709

July 10, 2018

Quiet But Better

Domestic stocks were volatile but better during last week’s abbreviated trading. Volumes were predictably low, especially on the two days surrounding the July 4 holiday. Continuing the pattern of recent months, the tech-heavy Nasdaq and the smaller-cap benchmarks outperformed. Health care stocks were particularly strong within the S&P 500, while financials shares lagged.

The market opened the week lower, following steep overnight losses in Asia as a measure of Chinese manufacturing activity came in below expectations and trade war worries continued to weigh on sentiment. A stronger-than-expected report on U.S. manufacturing activity may have helped turn markets around, however, and stocks ended Monday with a gain. The momentum carried into early Tuesday, but stocks later gave back their gains in the shortened trading session.

Momentum picked up again when trading resumed on Thursday, but volumes remained well below normal as many traders enjoyed an extended holiday. Many others were reluctant to act in advance of the U.S. imposition of tariffs on China on Friday, as well as the Labor Department’s important monthly jobs data report. Those who were involved pushed the S&P 500 to its best daily gain in a month, with sentiment seemingly helped in part by a strong service sector activity reading.

Friday’s payrolls report came in a bit stronger than expected, helping end the week on a positive note. The U.S. created 213,000 new jobs in June, better than consensus, and another hearty gain that suggests that companies are finding ways to fill open jobs despite a dwindling pool of skilled workers. In a surprise, the unemployment rate rose to 4 percent last month after dropping to an 18-year low of 3.8 percent in May, largely on account of 600,000 people entering the work force. Since more Americans look for jobs when they are seen as easier to find, this was taken as another sign of labor market health. The number of people who were unemployed also grew by half a million, but the increase was likely tied to the end of the school year when students enter the workforce. The shrinking pool of labor is slowly forcing companies to raise pay as the competition for talent intensifies, but they are still generally managing to keep labor costs down, with wages staying roughly flat over the past year when taking account of inflation.

On Thursday, the Federal Reserve released the minutes of its June 12-13 policy meeting. They revealed that policymakers had shifted their perceived distribution of risk away from the upside and indicated that Fed officials now believe risks to economic growth appear more broadly balanced. The Fed also highlighted the possibility that growing trade frictions would weigh on business sentiment and investment spending. Policymakers also voiced concerns over the potential downside risks to economic growth and inflation due to economic developments in Europe and emerging markets.

Neither the Fed minutes nor the important payroll data had a large impact on long-term interest rates, with the yield on the benchmark 10-year U.S. Treasury note decreasing slightly for the week.

European equities ended last week mixed as trade talk continued to dominate market sentiment. Markets began the week in negative territory as President Trump threatened withdrawal from the World Trade Organization and emphasized that his next tariffs would likely target automobiles. The EU countered with threats to levy measures on nearly $300 billion of U.S. goods. Banking, mining, oil, and automotive shares traded in negative territory early in the week before gaining ground after trade tensions eased following a positive reception from lobbying efforts and proposals for the EU and the U.S. mutually to lower tariffs. Market sentiment tilted toward a more cautious and defensive tone by week’s end, with utilities and food company stocks among the gainers. The pan-European STOXX 600 ended the week up by less than 0.5 percent, while the UK’s blue chip FTSE 100 logged a decline.

In Japan last week, the Nikkei suffered its third straight losing week and dipped to a three-month low on Thursday before rallying about 1 percent on Friday. Banks and tourism-related companies sold off on concerns about the implementation of U.S. tariffs on Chinese goods. Several of the major Japanese banks fell to their lowest levels since late 2016. Retailers were also punished as traders dumped the group on speculation that Chinese tourist activity would decline.

Elsewhere in Asia, China’s main stock indexes extended a stretch of weekly losses as trade tensions with the U.S. ratcheted up. For the week, the benchmark Shanghai Composite shed 3.5 percent for its seventh straight down week, while the large-cap CSI300 fell 4.2 percent, its fifth weekly decline in a row. Friday’s decline pushed the Shanghai deeper into bear market territory, off nearly 23 percent from its January high.

The U.S. imposed tariffs on $34 billion of Chinese products, effective Friday at midnight, which prompted China to hit back with similarly sized tariffs on U.S. products. News that the U.S. is following through on its threat to levy tariffs on an initial round of Chinese products marks an escalation in U.S.-China trade tensions. Nonetheless, the immediate economic impact of both sides’ tariffs will be relatively small — just 0.1 percent of each country’s respective GDP.

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