Subdued and Down
Domestic stocks fell modestly last week after a Friday rally broke a four-day losing streak for the S&P 500 and partially compensated for earlier losses. Small- and mid-caps outperformed larger shares. The tech-heavy Nasdaq performed the best of the major indexes, but still traded off about one percent for the week. Within the S&P 500, utilities and real estate stocks fared best, helped by a decline in longer-term U.S. Treasury yields, which make their dividend payments more attractive by comparison. Conversely, the much larger financials sector, which sees lending margins squeezed by lower interest rates, was among the market’s weaker segments.
Fears of heightened global trade tensions appeared to be the main factor weighing on sentiment early last week. Traders continued to worry about retaliation following the previous week’s announcement of new U.S. tariffs on steel and aluminum imports, but major trading partners in Asia and Europe appeared to be taking a wait-and-see approach before responding in kind. Markets were also unsettled by President Trump’s dismissal of Secretary of State Rex Tillerson, widely viewed as a free trade advocate within the administration. Also worrisome were reports that the president had requested the preparation of a package of tariffs targeting China. Finally, although not a trade issue, news that Special Counsel Robert Mueller had subpoenaed President Trump’s business organization appeared to drain the energy from an early rally on Thursday.
The week’s economic data may have also dampened sentiment. The Commerce Department reported that retail sales declined 0.1 percent in February, well below the 0.3 percent rise many expected. February consumer prices rose modestly and in line with expectations, but the absence of an upside surprise seemed to add to worries of a potential slowdown in global growth. Indeed, the retail sales number and other data caused the Atlanta Federal Reserve’s GDPNow model, a running estimate of current-quarter economic growth, to fall to 1.8 percent by the end of the week, a slowdown from late 2017 and well below recent consensus expectations. The subdued growth and inflation data led to a modest decrease in the yield on the benchmark 10-year U.S. Treasury note, which bottomed on Wednesday morning before rising again later in the week. Bond trading was generally subdued ahead of next week’s FOMC meeting, at which the consensus expects a 25bp interest rate hike.
European equities ended last week mixed amid relatively light trading volumes, disappointing inflation numbers for the eurozone, and political uncertainty about the prospects of a trade war and other geopolitical tensions. At the start of the week, the pan-European benchmark STOXX 600 gained ground following the strong U.S. jobs report the week before. Germany’s DAX 30, Spain’s IBEX 35, and France’s CAC 40 all trended higher in what traders have been calling a “Goldilocks” environment in that trade concerns calmed, oil prices were steady, and volatile bond yields and interest rate uncertainty were no longer forefront topics. However, by midweek, investor sentiment turned more negative amid President Trump’s staffing reshuffles, U.K. Prime Minister Theresa May’s assertion (confirmed by Britain’s major allies, including the U.S.) that Russia was connected to the chemical poisoning of a former spy on British soil, and news of softer-than-expected economic data.
By the end of the week, trade volumes were subdued and somewhat stuck in a holding pattern as investors worked through the geopolitical uncertainty. Meanwhile, the European Central Bank (ECB) signaled that it would continue its monetary policy and that it would have to have more confidence that inflation was rising before ending net asset purchases. Eurozone industrial production fell 1.0 percent in January compared with the month before.
In Asia, stocks advanced in China as the government there announced that it would merge its banking and insurance regulators, a long-awaited move that aims to tighten control of the country’s financial sector and curb the risks that have accompanied years of rapid credit growth. In Japan, stocks were mixed as a long-simmering real estate scandal resurfaced during the week, raising fresh questions about the ability of Prime Minister Shinzo Abe to weather the storm.