Mostly Flat and Quiet
Domestic stocks didn’t do much of anything last week. Financial shares outperformed within the S&P 500, helped by strong gains at midweek, while telecommunication services stocks lagged. Spurred by Amazon’s report of healthy “Prime Day” shopping revenues, the tech-heavy Nasdaq managed to set a record high early in the week before falling back. Trading volumes remained subdued throughout the week.
The second week of major quarterly earnings reports drove a generally directionless market during the week. Particularly notable was Netflix’s report of subscriber additions, which was well below the estimate the company had offered in April. The news sent the stock down as much as 14 percent in early trading Tuesday before it recovered somewhat. Analysts polled by both FactSet and Thomson Reuters are expecting overall earnings for the S&P 500 to have risen by around 21 percent in the second quarter versus a year ago, only a modest slowdown from the first quarter’s robust 25 percent gain.
The week’s economic data were generally favorable. Retail sales excluding the volatile auto and gasoline components rose 0.3 percent in June, and industrial production also posted large gains. Initial jobless claims fell to 207,000 for the week ended July 14, the lowest level since December 6, 1969, the day of the infamous Altamont music festival. However, both housing starts and new housing permits declined to their lowest rates since September 2017, with the former falling 12.3 percent in June and the latter down 2.2 percent.
On Thursday, President Trump sparked a brief rally in equities and a sell-off in the U.S. dollar after the release of a CNBC interview in which the president said that he was “not happy about interest rates going up.” Commodities — which are often priced in dollars and become less expensive to non-U.S. buyers when the dollar falls — also rose on the news. Whether Federal Reserve officials would adjust monetary policy in response seemed highly doubtful to most observers, however. On Friday, President Trump also further sharpened his trade rhetoric, threatening to put tariffs on all Chinese imports into the U.S., totaling over $500 billion. Markets appeared to shrug off the threat, however, despite new evidence from the Fed suggesting that the president’s new tariffs on intermediate inputs will have a significant negative impact on U.S. manufacturing.
Bond prices did not react dramatically to either of President Trump’s statements, but the yield on the benchmark 10-year U.S. Treasury note did end the week somewhat higher, at 2.89 percent. The 30-year U.S. Treasury bond closed the week yielding more than three percent (3.03 percent), the highest yield sine June. Meanwhile, the 2-Year U.S. Treasury note hit its highest yield level in 10 years last week (2.62 percent). The last time the 2-year was north of 2 percent, the 10-year U.S. Treasury note was yielding 100bp more and the 30-year U.S. Treasury bond was yielding 170bp more. Meanwhile, 15 countries still have negative yields as the ECB/Bank of Japan, Swiss National Bank, Riksbank (Sweden), and Denmark’s National Bank have yet to hike rates from all-time lows.
Key European stock indexes closed last week flat to lower amid the same news together with uncertainty surrounding Brexit negotiations. Mining and automotive stocks lost ground late in the week after President Trump’s newest tariff threats. Germany’s DAX 30 led losses across Europe. Germany is a major exporter, and the DAX 30 index has been highly reactive to global trade uncertainty. Bank stocks also fell following news that Mr. Trump hoped that the Fed would stop raising interest rates. Many European banks have operations or significant exposure to the U.S. market, and lower interest rates can crimp profits. The pan-European STOXX 600 Index held on to a slight gain for the week, boosted by positive reaction to a raft of positive corporate earnings results.
In Asia, Chinese equities hit a 10-month low, down 9 percent YTD and 23 percent from their January high. China’s currency sank versus the U.S. dollar on the trade tension news. On Wednesday, the yuan fell to its lowest level against the dollar since July 2017 in offshore trading, though it recovered on Friday after a large Chinese bank reportedly sold dollars to prop up the currency. The week’s decline adds to recent weakness in the yuan, which dropped about 5 percent in the second quarter. The yuan’s recent weakness raised speculation that Beijing is content to allow China’s currency to depreciate to hit back at the U.S. in the escalating trade battle, as a weaker yuan should help Chinese exports.