The WMA Weekly Market Wrap v.180717

July 17, 2018

Quiet and Volatile, but Better

Most of the major domestic equity benchmarks saw gains last week despite substantial volatility. The smaller-cap benchmarks and the tech-heavy Nasdaq managed to climb to new records, but the narrowly focused Dow performed best as large-caps outpaced small-caps. Trading volumes were subdued for most of the week as many seemed sidelined ahead of second-quarter earnings reports, which began in earnest on Friday. Within the S&P 500, information technology shares performed best, while utilities stocks lagged.

The ebb and flow of trade worries continue to dominate sentiment here and abroad. The lack of any bad news on the trade front over the previous weekend helped stocks get off to a strong start to the week, but stocks retreated as trade tensions rose again on Wednesday, following news that the U.S. was planning to follow through on a threat to impose tariffs on an additional $200 billion worth of Chinese goods. The lack of an immediate response from China was met with relief, however, helping stocks rebound on Thursday. Traders also seemed reassured by President Trump’s eventual affirmation of his commitment to NATO at the organization’s summit in Brussels.

The impact of ongoing trade disputes was evident in producer prices, which rose 0.3 percent in June, building on a 0.5 percent increase in May. On an annualized basis, producer prices rose 3.4 percent, their fastest increase in nearly seven years, according to Reuters. Increased costs for metals used in construction and manufacturing appeared to be behind much of the increase, suggesting that the steel and aluminum tariffs recently put in place by the Trump administration are driving up input costs.

Consumer price inflation remained more contained but also appeared to be inching higher. Consumer prices in June increased 2.9 percent over a year ago, the highest rate in six years and more than offsetting the 2.7 percent increase in average annual wages over the same period. Indeed, inflation concerns appear to be growing among Americans. In their latest survey of consumer sentiment, researchers at the University of Michigan noted that over half of Americans in the top third of the income distribution expressed concerns about the economic impact of tariffs.

European stocks were generally higher in yet another week punctuated by escalating trade tensions, as well as political uncertainty amid ongoing Brexit negotiations. Despite one of the biggest one-day drops in oil prices in two years, the fallout from such a sharp move was muted in other markets. Midweek, trade war talk ratcheted up after the U.S. announced it aimed to apply a 10 percent tariff on $200 billion of goods in retaliation for China’s earlier retaliatory tariff action against U.S. goods. European stocks, particularly shares of basic resources companies, sank on the news, but the market moved toward recovery in the absence of an immediate response from China. The pan-European STOXX 600 Index ended the week less than one percent higher.

In Asia, Japanese stocks saw their best weekly gain in six months. In China, stocks gained as well, with trading closely tied to American price action. Many in Asia think that it is possible that relations between the U.S. and China may improve in the near-term. However, the path toward an ultimate trade agreement seems narrower and more uncertain than it had been.

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