The major domestic equity benchmarks posted mixed performance last week, but were mostly lower. The smaller-cap indexes, which are typically more volatile, declined, while some of the larger-cap benchmarks recorded a modest gain. MarketWatch and the WSJ Market Data Group reported that the Dow and the broader S&P 500 had recently experienced their lowest correlation since 2003, due mainly to the larger representation of tech stocks in the S&P.
Trading volumes were predictably very light early in the week, given the abbreviated trading session on Monday and the Fourth of July holiday on Tuesday. Stocks recorded modest gains on the back of those light volumes, with tech shares, which have recently been exceptionally volatile, bouncing back on Wednesday.
Sentiment soured and prices plummeted on Thursday, which caused the S&P 500 to record its worst daily decline since May, although trading volumes remained moderate. The generally accepted reasons were several. U.S. Treasury yields had been higher for seven of the previous eight trading days and minutes from the Federal Reserve’s June meeting, released the previous afternoon, did little to change expectations that a third rate hike was coming this year. Minutes from the recent European Central Bank policy meeting similarly weighed on markets after revealing some discussion about removing their easing bias (see below). Finally, on the geopolitical front, markets were not receptive to President Trump’s warning of “pretty severe things” that could happen in response to North Korea’s successful intercontinental ballistic missile test.
Friday brought the monthly jobs data and some reassuring news that helped stocks regain a bit of ground. The Labor Department reported that employers had added many more jobs than anticipated in June, helping reverse a string of disappointingly small monthly increases. A rising number of aggregate hours worked suggests that labor income is increasing at a more substantial pace. Even the tick up in the unemployment rate, to 4.4 percent, was seen as good news in that it suggests that job-seekers are returning to the job market.
While payroll gains were broad-based and boosted by the biggest jump in government jobs in almost a year, wages were below forecasts, even with the jobless rate close to the lowest since 2001. Nevertheless, the report marks a relatively strong finish for the labor market in the second quarter that should support continued gains in consumer spending in the coming months. Fed policy makers raised interest rates last month and reiterated plans to start reducing their balance sheet and increase borrowing costs once more this year.
Longer-term U.S. Treasury yields did not move substantially in response to the jobs report but increased for the week. Moves during the short trading week were the result of mixed economic data, the negative influence of European debt issuance, and volatility in oil prices.
European stock markets ended the week in slightly negative territory – a hangover from a global equity sell-off that followed new signs that central banks could be leaning toward tightening fiscal monetary policy. Minutes from the ECB’s June meeting published on Thursday showed that policymakers had considered whether to withdraw the ECB’s pledge to increase the pace of its bond-buying program if needed to boost the economy. Following the release, 10-year German bund yields increased to over 0.56 percent at Thursday’s close. The Pan-European index Stoxx 600 ended flat for the week.
In Asia, Japanese equities also declined last week. However, Japanese Foreign Minister Fumio Kishida and European Union Trade Commissioner Cecilia Malmström confirmed an outline for an Economic Partnership Agreement. The free trade deal, which stands in stark contrast to President Trump’s promised protectionism, was inked by Prime Minister Shinzo Abe and European Council President Donald Tusk on Thursday after having been in the works since 2013. Although the details of the EPA will not be finalized until later in the year, the agreement is expected to remove tariffs over a multiyear period on 95 percent of traded goods among the participants. That result would be a significant boon to the involved economies and to the markets there.
China’s foreign currency reserves rose for the fifth straight month in June, aided by the government’s efforts to stop money from leaving the country and a weak U.S. dollar. The string of monthly gains in China’s cash reserves shows that Beijing has been largely successful in controlling capital outflows and supporting the yuan in the near term, despite expectations for the currency to weaken over time.