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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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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Trade War Leads to Lousy Week

Domestic stocks had a lousy week. The tech-heavy Nasdaq and the smaller-cap benchmarks fared worst after outperforming the previous week. Within the S&P 500, energy stocks performed best as oil prices reached new four-year highs. Health care and consumer staples shares lagged, dragged lower by drug store operators amid concerns that Amazon’s acquisition of an online pharmacy could lead to intense price competition and possibly smaller profit margins for the sector.

The markets began the week on a markedly down note. On Monday, the S&P 500 suffered its worst daily decline in nearly three months while the Dow closed below its 200-day moving average for the first time since immediately after the surprise Brexit vote in 2016. Trade concerns were at the root of the problems, with traders concerned about new threats from the Trump administration to block Chinese access to U.S. technology. The Wall Street Journal reported on Monday that administration officials were planning to bar Chinese firms from investing in U.S. technology companies and to impose new limits on U.S. technology exports to China.

Trade worries deepened later Monday and into Tuesday after Harley-Davidson revealed in an SEC filing that it was planning to move some of its motorcycle production overseas to avoid retaliatory tariffs recently announced by the European Union. President Trump responded by harshly criticized the company in a series of tweets.

The president seemed to moderate his rhetoric at midweek, however, which may have helped the market recover somewhat. On Tuesday afternoon, Mr. Trump told a group of White House reporters that the government would continue to rely on the Committee on Foreign Investment in the United States in limiting Chinese investments in U.S. technology. On Thursday, the president spoke in Wisconsin at the opening of a plant operated by Taiwanese technology giant Foxconn — a source of foreign investment in the U.S. that he had celebrated early in his administration. Traders observed that his address was notable for its benign tone, with the president emphasizing how all the threats and hyperbole surrounding trade are part of a negotiation that will ultimately prove successful. The president also implied that the EU has reached out to discuss a compromise.

On a sector basis, notable developments during the week included the sharp rise in oil prices, which appeared to result from both falling U.S. supplies and reports that the Trump administration was aiming to shut down all Iranian crude exports by November 4. The higher prices boosted energy stocks, but traders noted that the rally in crude oil may have also weighed on the stocks of oil consumers. Financial shares helped lead an early rally Friday, as traders seemed to be relieved that all major U.S. banks cleared the Federal Reserve’s annual stress tests. A positive earnings surprise and favorable guidance from Nike also helped the major indexes move higher.

Bloomberg reported that companies in the S&P 500 rely upon foreign markets for about one-third of their revenue. According to Bank of America/Merrill Lynch, the current rise in tariffs will negatively impact S&P 500 profits by three to four percent. Goldman suggests a two to three percent decline. In any event, the impact is significant. Tech stocks have dominated market performance since 2016; foreign sales account for nearly 60 percent of their revenues. The next highest group within the S&P is the industrials sector at 38 percent of revenues.

The week’s economic signals were mixed. New home sales jumped in May, but housing prices softened. New durable goods orders fell 0.6 percent month-over-month in May, with core capital goods falling 0.2 percent, as orders were lower across the board. Growth in first-quarter gross domestic product was revised lower, from 2.2 to 2.0 percent, as small contributions from inventory growth and net exports were reduced and became drags on the estimate. Weekly initial jobless claims rose slightly but remained at historical lows. Personal income rose 0.4 percent in May and consumer spending rose 0.2 percent, both in line with estimates. The Atlanta Fed increased its estimate of second quarter GDP growth to 4.5 percent as we reached the six-month “anniversary” of the president’s tax cut plan. Other forecasters boosted their forecasts to 5 percent. The only time growth has topped 5 percent since 2003 was the third quarter of 2014, when the economy grew by 5.2 percent. The yield on the benchmark 10-year U.S. Treasury note decreased over the week.

Key European stock indexes also ended the week lower, weighed down by uncertainty about global trade and political wrangling over immigration. Trade volumes were down significantly at the beginning of the week, an indication of uncertainty about the direction of the markets. The pan-European STOXX 600 Index logged about a 1 percent loss and the export-heavy German DAX 30 was lower by close to 2 percent. Most of the losses came early in the week as traders seemed worried that a global trade war would drag down the European economy. Some of the heated trade rhetoric between the U.S. and European countries as well as China softened as the week progressed, as noted above, fueling a partial recovery in equities.

In recent weeks, investors have withdrawn billions of dollars from European equity and bond funds, concerned that trade frictions could dent a fragile economic recovery in a region heavily exposed to international trade. During recent sessions investors have been weighing signals from the U.S. and China about the future of their trading relationship, which some worry could hurt the outlook for growth.

In Asia, the Shanghai Composite Index, China’s benchmark stock index, lost 1.5 percent last week despite a sharp bounce higher on Friday after the country officially announced that it would further open its markets to foreign investment. The large-cap CSI300 Index fared worse, falling nearly 3 percent. June was the worst month for Chinese stock returns in more than two years, and both the Shanghai Composite and the CSI300 were among the poorest-performing major indexes in the world YTD. As in the rest of the world, but worse, fears of a trade war with the U.S. continued to weigh on investor sentiment toward China. Japanese stocks also lost about one percent last week.

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More Trade-Offs

The major domestic equity benchmarks closed flat to lower last week. The narrowly focused Dow performed worst, hurt by its focus on industrial firms and exporters as trade conflicts deepened. The tech-focused Nasdaq fared better and reached a new record high at midweek, as did the small-cap Russell 2000. Within the S&P 500, the real estate and utilities segments outperformed, aided by a decline in long-term bond yields, which make their relatively high dividend payments more attractive in comparison. Industrials performed worst due to the trade worries, dragged lower in particular by leading exporters Boeing and Caterpillar.

On Tuesday, stocks opened sharply lower after President Trump directed his administration to draw up a list of tariffs on another $200 billion of Chinese goods, and a Chinese Commerce Ministry official warned that the country would respond in kind. On Thursday, stocks slumped again after German automaker Daimler (maker of Mercedes) lowered its outlook, citing the likelihood of lower sales for SUVs that the company makes in the U.S. and exports to China. After earlier suggesting that it might cut its tariffs on auto imports, China has recently threatened to increase them in response to the latest U.S. trade volleys. On Friday, President Trump further clouded the outlook for Daimler and other European automakers by warning that the U.S. would place 20 percent tariffs on auto imports from the EU if it did not lower its own barriers.

The energy sector was particularly volatile last week, falling through Thursday before rallying on Friday after OPEC ministers meeting in Vienna announced a smaller-than-expected increase in oil production. Consumer discretionary stocks also reacted to some notable developments. Media shares rallied after Disney sweetened its offer for most of the assets of 21st Century Fox, while Amazon and other major online retailers fell following a Supreme Court decision granting states the right to tax online sales by out-of-state firms.

Some disappointing economic data also appeared to be a drag on stocks. Traders pointed in particular to weaker-than-expected building permits and existing home sales, as well as a slowdown in a gauge of regional manufacturing activity. The labor market remained in solid shape, however, with weekly jobless claims hovering near levels last reached in the early 1970s, when the labor market was just over half of its current size. Yields on the benchmark 10-year U.S. Treasury note closed last week roughly unchanged.

In a volatile week for European equities, most of the major indexes closed lower. The pan-European STOXX 600 Index fell by about 2 percent, with most of the losses coming midweek, when automobile, mining, and tech stocks led the index lower. Also losing ground was the exporter-heavy German DAX 30. As in the U.S., escalating trade tensions between the U.S. and Europe were key. Certain U.S. goods, including bourbon, cranberries, and Harley-Davidson motorcycles were among the €2.8 billion ($3.2 billion) worth of products that will now carry tariffs. The move came in response to new U.S. tariffs on European aluminum and steel. Trade tensions weighed on mining and tech stocks, along with auto shares.

In Asia, China’s benchmark stock index ended the week on the verge of a bear market — commonly defined as a drop of at least 20 percent from its high — as trade pressures were the key driver there too. China’s state-run media called U.S. protectionism a “symptom of paranoid delusions” and said that U.S. measures to penalize China would ultimately backfire on U.S. workers. For the week, the benchmark Shanghai Composite Index shed 4.4 percent and the large-cap CSI300 Index fell 3.8 percent, marking the worst week for both gauges since February. Friday’s weekly drop pushed the Shanghai index down 19 percent from its latest high in January. Japanese stocks fell too, if not as precipitously.

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Narrowly Mixed

The major domestic equity indexes ended last week narrowly mixed. A drop on Friday erased gains for the Dow and the S&P MidCap 400, while the tech-heavy Nasdaq and small-cap Russell 2000 indexes were able to remain in positive territory. The S&P 500 was virtually unchanged. The Nasdaq, S&P MidCap 400, and Russell 2000 all managed to set new record highs during the week before falling back Friday. Within the S&P 500, consumer discretionary and utilities stocks performed best, while energy, financials, materials, and industrials shares recorded steep losses.

Stock prices fluctuated within a small band for most of the week — a notable contrast to the volatility of recent months — as traders seemed largely unmoved by a series of important macroeconomic events and data. In particular, the summit between North Korea and the U.S., which resulted in a televised signing ceremony on Monday, seemed to have little impact on markets, perhaps because the details of North Korea’s promised denuclearization remain unknown or undetermined.

Stocks had a larger reaction to the Federal Reserve’s policy meeting on Wednesday. Fed officials decided to raise the federal funds rate by another 25bp, as expected, but stocks fell after policymakers offered a slightly more hawkish outlook. According to the Fed’s “dot-plot” survey of individual policymaker’s rate expectations, one more official now expects a total of four rate hikes in 2018, rather than three. Disquiet over the prospect of a faster pace of rate hikes in the U.S. may have been offset by a somewhat more dovish tone from the European Central Bank during the week. The Fed’s change in tone had more of an impact on emerging markets.

The week’s economic data was generally positive, which may have assuaged rate concerns. On Tuesday, the Labor Department reported that headline inflation in May had reached 2.8 percent on a year-over-year basis, its highest level since 2011. The rise in oil prices deserved much of the blame, however, and core inflation (less food and energy costs) remained roughly in line with the Fed’s target. Retail sales data delivered more of an upside surprise. Core retail sales (excluding sales at automotive dealers, building materials stores, and gas stations) rose 0.6 percent in May, while previous months were revised higher. Spending increases have been running ahead of income gains in recent months, causing a pickup in the use of credit and a decline in the savings rate.

Traders had a bigger reaction to international trade news on Friday. The Trump administration announced that it was following through with an earlier threat to impose tariffs on imports of $50 billion worth of goods from China, which came on the top of earlier announced steel and aluminum tariffs. China quickly promised to respond with its own tariffs on a similar scale, which seemed to take a large toll on materials and industrials shares. Notably, the producer price index rose 0.5 percent in May as large jumps in prices for steel and aluminum impacted the reading. The yield on the benchmark 10-year U.S. Treasury note briefly broke through the 3 percent threshold following the Fed meeting but ended slightly lower for the week.

Most European markets closed last week higher, boosted early in the week by bank, mining, and energy shares. Volumes were generally muted as traders apparently awaited news from the planned ECB meeting. The pan-European STOXX 600 finished nearly 2 percent higher, logging its biggest daily gain since last April, according to FactSet data, aided in part by a tumbling euro. By the end of the week, most key indexes lost ground as investors’ concerns about the escalating trade dispute between the U.S. and China intensified. The UK blue chip FTSE index ended the week flat.

In Asia, large-cap Japanese stocks posted gains, but small-caps edged lower. In China, the benchmark stock index ended last week at a its lowest level since September 2016, as traders fretted that the widening trade rift with the U.S. would weigh on the country’s growth. For the week, the benchmark Shanghai Composite Index shed 1.5 percent, its fourth weekly decline, while the large-cap CSI300 Index declined 0.7 percent. The declines in China came hours before the Trump administration announced that it approved tariffs on Chinese goods worth about $50 billion. Additionally, the U.S. has nearly completed a second list of tariffs on $100 billion in Chinese goods, Reuters reported on Friday.

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A Good Week

Domestic stocks recorded solid gains last week, with the Nasdaq and S&P MidCap 400 indexes reaching new peaks and the S&P 500 hitting its best level since early March. Despite setting a record – snapping its longest streak without a fresh high since 2016 – the tech-heavy Nasdaq lagged the other benchmarks due to declines late in the week. On a sector basis, consumer discretionary shares performed best within the S&P 500, while utilities stocks suffered substantial losses as long-term U.S. Treasury yields rose, making their relatively high dividend payments less attractive in comparison.

Traders suggested that the afterglow from the previous week’s strong employment and manufacturing data seemed to help the market move higher early in the week. Further good news arrived Tuesday, when several surveys indicated better-than-expected expansion in both the manufacturing and services sector. A sharp increase in mortgage applications, reported Wednesday morning, was also encouraging.

A decline in the U.S. dollar also boosted sentiment as a weak greenback boosts the competitive prospects of U.S. exporters and increases the value of profits earned overseas by U.S. companies in dollar terms. The dollar fell in particular against the euro as worries ebbed about Italy’s new government and speculation grew that the European Central Bank might soon announce a change in monetary policy.

The week’s market advance came despite continuing worries about heightened trade tensions and other international conflicts. Heading into this weekend’s meeting of the Group of Seven industrialized nations, President Trump signaled his intention to continue pursuing an aggressive trade agenda even at the expense of America’s standing in the world. For decades, the G-7 summit has been a venue for the richest countries to coordinate policies around trade and shared values, and the U.S. was the undisputed leader. Now, it appears that the Trump administration seems less interested in maintaining the post-World War II trading system and more concerned with domestic priorities (“America First”).

The immediate focus of the talks — which include Canada, France, Germany, Italy, Japan, the U.K. and the U.S. — will be the Trump administration’s decision to impose tariffs on steel and aluminum imports from fellow G-7 countries. Even before the meetings, the White House said that President Trump would leave the summit much earlier than planned, as the general dispute got hot quickly on Thursday over the U.S.’s trade stance between Mr. Trump and two of America’s closest allies: Canada and France. A relatively cordial start to the summit may have lifted sentiment on Friday afternoon, however. Uncertainty surrounding the June 12 summit between the U.S. and North Korea in Singapore may have also worried some.

Meanwhile, China hawks in Congress and in the administration lost a battle over ZTE when, despite lots of tough talk on China, the Trump administration announced a surprisingly soft deal Thursday to resuscitate the Chinese telecommunications giant, which many see as a major security threat, but they made it clear their war against Chinese tech companies is far from over. As noted above, U.S. Treasury yields ended modestly higher for the week after peaking Wednesday afternoon.

European equities finished last week lower as trade tensions once again rattled financial markets there on the eve of the G-7 summit. Following President Trump’s tweet that accused Canada and the European Union of having unfair trade barriers, most European equities headed lower. The German DAX, which holds several export-dependent companies, posted a loss of more than 1 percent by week’s close. The pan-European STOXX 600 Index and the UK’s blue-chip FTSE 100 Index each logged a decline of around 0.8 percent for the week. European traders remained worried about whether the U.S. would continue to levy tariffs on imported European steel and aluminum.

In Asia, Japanese stocks rallied, with the Nikkei 225 Stock Average advancing more than 2 percent for the week. China’s benchmark stock index fell for a third consecutive week as U.S. trade concerns and Beijing’s nationwide deleveraging campaign targeting debt-laden companies weighed on sentiment. For the week, the benchmark Shanghai Composite shed 0.3 percent. Friday marked the end of the first week of trading for the roughly 200 Chinese companies that joined MSCI’s global equity benchmarks on June 1. The addition of Chinese A shares to MSCI’s indexes — including its flagship Emerging Markets Index — was expected to attract large capital inflows into China, but the performance of Chinese stocks has proved disappointing this year. Through Friday’s close, the Shanghai Composite has fallen 7.2 percent YTD, while the CSI300 has shed 6.2 percent, according to Dow Jones.

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There and Back in the Same Week

Domestic stocks finished last week modestly higher after quickly recovering from a post-Memorial Day sell-off amid worries about Italian politics and the stability of the eurozone. The small-cap Russell 2000 outperformed the broader market, reaching record highs, as did the tech-heavy Nasdaq. On the negative side, the blue chip Dow declined. Tech shares performed well, while financial stocks struggled as a sharp decrease in longer-term Treasury yields led to worries about bank profitability.

Traders attributed last week’s market action to a wide range of factors, from European politics to trade worries as the U.S. imposed tariffs on steel and aluminum from the European Union, Canada, and Mexico and thus faces retaliation for doing so. Continued volatility in oil prices and month-end positioning activity also played roles. Despite these factors, the S&P 500 remains largely range-bound and has remained in a narrow range since May 9. The “on again” nature of the summit with North Korea happened late on Friday and didn’t make an impact.

The price of West Texas Intermediate oil, the U.S. crude benchmark, continued to decline following OPEC’s pre-Memorial Day decision to increase its output and finished the week below $66 per barrel. News reports about strife among OPEC members contributed to further price declines. Oil prices did not fall steadily, however, as a sharp midweek rally pared earlier losses.

The monthly jobs report was issued on Friday and it was a very good one. The unemployment rate fell to an 18-year low, employers added jobs at a faster pace, and wages modestly improved. The unemployment rate ticked down to a seasonally adjusted 3.8 percent in May, matching April 2000 as the lowest reading since 1969. Non-farm payrolls rose a seasonally adjusted 223,000 in May, a jump in gains from March and April. Average hourly earnings ticked up to a 2.7 percent from a year earlier – and raises were even stronger for nonmanagers.

U.S. employers have now added to payrolls for 92 straight months (almost eight years), extending the longest continuous jobs expansion on record. Those gains are extending to all corners of the labor market. The unemployment rate for women, 3.6 percent in May, was the lowest since 1953, when a far smaller share of women sought jobs. The jobless rates for blacks, Latinos and those without high-school diplomas are all trending near record lows.

Last week, bonds traded much like stocks, but in the opposite direction. On Tuesday, demand for safe-haven securities amid political turmoil in Italy triggered a rally in U.S. Treasury paper, driving the benchmark 10-year U.S. Treasury note’s yield to its largest one-day decrease since the Brexit vote in June 2016. However, yields increased later in the week to close only modestly below where they started.

In Europe, the news focus was that Italy’s populist Five Star Movement and far-right League party formed a coalition government, naming an academic and political novice, Giuseppe Conte, as prime minister. It was a week characterized by uncertainty amid political deal-making and calls for impeaching Italian President Sergio Mattarella by coalition members angry that their plans for a nascent government were being blocked. Investors fled Italian stocks, and bond spreads widened as a result, with much of the concern centered on whether Italy, one of the eurozone’s largest economies, would abandon the euro and how the country would handle its vast public debt (third highest in the world, behind the U.S. and Japan). Traders also seemed to be concerned that populist sentiment elsewhere in the eurozone, strengthened by the events in Italy, could threaten the long-term survival of the currency bloc. European stocks generally traded off, as well.

In Asia, stocks generally weakened on account of global risk aversion. In China, the “risk off” tendency overcame the perceived benefits of the long-awaited inclusion of Chinese A shares into MSCI’s global equity benchmarks. For the week, the benchmark Shanghai Composite Index and the large-cap CSI300 Index dropped 2.1 and 1.2 percent, respectively. The declines in Chinese stock markets continued into Friday, when 234 Chinese companies officially joined MSCI’s global equity benchmarks, including its flagship Emerging Markets Index.

Mostly Quiet, A Bit Higher

The major domestic stock market indexes were flat to slightly higher in light trading ahead of the Memorial Day weekend last week. The small-cap Russell 2000 Index lagged, reversing a recent stretch of outperformance that brought the benchmark to record highs. Energy shares performed worst within the S&P 500 Index, while utilities stocks recorded solid gains as longer-term bond yields fell, making their relatively high dividend yields more attractive in comparison.

The week was perhaps most notable for the plunge in oil prices and energy shares. On Monday, oil prices reached their highest level since late 2014 on speculation that the U.S. would impose new sanctions on Venezuela after the country’s leadership solidified its control in elections over the weekend widely regarded as corrpupt. Venezuela has the largest proven oil reserves in the world, although its production has been constrained by the country’s economic collapse.

Oil prices reversed course abruptly on Tuesday afternoon, however, following reports that OPEC was planning to increase production as early as June in order to prevent further price increases from destroying demand. Ironically, the threat of U.S. sanctions appeared to be partly at work in this case as well, with some speculating that OPEC was seeking to compensate for the loss of Iranian and Venezuelan supply. Supply fears gained further traction on Friday, when Russian Energy Minister Alexander Novak stated that “the moment is coming” to end a deal among major exporters to cut back on production that had been in place since the start of 2017. By the close of trading on Friday, the price of a barrel of domestic West Texas Intermediate oil had declined by nearly 7 percent from its Tuesday morning high.

Last week saw a number of other major geopolitical developments, but most seemed to have had only a temporary impact on the broader market. Treasury Secretary Steven Mnuchin provided a boost to sentiment to start the week by remarking that the trade war with China was “on hold” after progress in talks over the weekend. On Tuesday, stocks got another brief lift after China announced a reduction in tariffs on auto imports, but trade sentiment turned sour again on Wednesday after the Commerce Department announced that it was investigating whether auto imports were posing a threat to the U.S. industry.
President Trump’s decision to cancel the upcoming summit with North Korea sent stocks sharply lower in early trading Thursday, although the market later regained its footing. Worries over the fiscal policies of the incoming Italian government and the worsening debt problems in Turkey also periodically appeared to weigh on sentiment.

Conversely, stocks appeared to get a brief lift from the release Wednesday afternoon of the minutes from the Federal Reserve’s policy meeting early in the month. Policymakers emphasized the “symmetric objective” of their 2 percent inflation target, suggesting that a slightly higher rate of inflation would be acceptable. Traders also seemed to be encouraged that Fed officials appeared uncertain about how tight the link had become between a tightening labor market and higher inflation — a crucial question for Fed policy with the unemployment rate now at a nearly 18-year low of 3.9 percent. This dovish tone to the Fed minutes and growing demand for perceived “safe-haven” assets amid geopolitical uncertainty helped push longer-term U.S. Treasury yields substantially lower for the week.

Geopolitical uncertainty and soft economic data led to European stock market volatility during the week, as traders wrestled with the ever-changing developments regarding a possible summit between the U.S. and North Korea, as well as growing concerns about political issues in Italy, Spain, and the UK. The pan-European STOXX 600 Index posted a weekly loss, breaking its longest string of gains since mid-2014. The index had a notable late-week dip after President Trump called off the planned summit with North Korea’s Kim Jong-un. Stocks recovered somewhat after a measured response from Kim Jong-un that may have mollified some skittish investors.

The threat of new tariffs on U.S. auto imports further depressed markets during the week. Shares of European companies that make some of the top-selling cars in the U.S. tumbled on the news, and the STOXX Europe 600 Automobiles & Parts Index lost nearly 2 percent. Germany’s export-heavy DAX 30 also retreated for the week.

In Asia, China’s benchmark stock indexes posted their biggest weekly drops in a month, capping a week marked by geopolitical volatility after President Trump pulled out of the summit with North Korea and Sino-U.S. trade tensions remained on low boil. By Friday’s close in Shanghai, the blue chip CSI300 Index and the Shanghai Composite Index had given up 2.2 and 1.6 percent, respectively, marking the worst weekly decline for each since late April. Japanese stocks also traded off for the week. On Friday, China’s official news agency stated that U.S. Commerce Secretary Wilbur Ross will visit China in early June for more trade talks. News of Ross’s visit comes as the U.S. and China continued to exchange threats and concessions about trade.

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Mostly Quiet, Mixed

The major domestic equity benchmarks were mixed but mostly down last week amid generally subdued trading volumes. Energy and materials stocks performed best, while real estate and utilities shares sold off as their relatively high dividend payments became less attractive following an increase in longer-term bond yields. Small- and mid-caps handily outperformed large-caps. The Russell 2000 ended the week with three straight record highs.

Stocks suffered much of their decline on Tuesday morning, after strong economic data raised fears about higher interest rates. Traders generally shunned riskier assets, turning away from growth stocks in favor of lower-priced value shares and selling off emerging markets assets. The Commerce Department reported that core (excluding auto, gas, and building materials) retail sales expanded by 0.3 percent in April. The figure was a bit below consensus estimates, but the government also revised February and March sales substantially higher. Current labor market trends are pushing up wage income at an annualized rate of about 4.5 percent, which should be sufficient to support a similar rate of nominal (i.e., unadjusted for inflation) spending growth over time.

Much of the rest of the week’s economic data were also positive. Two indexes of regional manufacturing activity came in much stronger than expected, and the Federal Reserve reported that overall industrial production grew more than anticipated in April. Housing sector data were mixed. A gauge of builder sentiment rose, but starts of new homes slowed down more than expected in April, largely due to a drop-off in multifamily construction. The solid economic data pushed the yield on the benchmark 10-year U.S. Treasury note up to 3.12 percent on Thursday, its highest level in seven years. The yield on the 30-year U.S. Treasury bond hit its highest level since June 2015.

Trade talks between the U.S. and China in Washington remained in focus throughout the week, with little clarity on the status of the negotiations. On Thursday, several news outlets reported that China had made an offer to cut its trade surplus with the U.S. by $200 billion, but a Chinese official on Friday denied that such an offer had been made. Separately, President Donald Trump said Thursday that Beijing had become too “spoiled” and he had lowered his expectations for negotiations. Geopolitical tension in the Korean Peninsula and throughout the Middle East remain constant sources of concern.

European equities were relatively volatile but ended last week higher. The pan-European STOXX 600 index reached its highest level since late January before settling a bit lower late in the week. The UK’s blue chip FTSE 100 also climbed to a record close, lifted by a report midweek that purportedly confirmed that Britain would retain some official trade ties with the European Union following Brexit. Germany’s export-heavy DAX 30 and France’s CAC 40 also closed higher. A rally in oil prices helped energy shares outperform and mining stocks were notably strong. Telecommunication services and banks lagged.

In Asia, Chinese stocks closed mixed last week after a trio of economic indicators there painted a mixed picture for China’s economy, suggesting that growth on the mainland may be entering a long-anticipated slowdown just as trade protectionism threatens to heat up. Japanese stocks advanced last week as the Nikkei 225 recorded its eighth positive week in a row and returned to positive territory for the year. The yen, which lost ground against the U.S. dollar as U.S. bond yields rose, on Friday traded at its lowest level since January. Emerging markets stocks in both Europe and Asia struggled.

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An Excellent Friday, A Mixed Week

Domestic stocks recorded solid gains last week, helping push all of the major benchmarks back into positive territory YTD. The S&P 500 notched its best weekly advance in two months and, on Thursday, closed above its 100-day moving average for the first time since mid-March. Financials shares were particularly strong, seemingly helped by an increase in longer-term bond yields early in the week, which offer the prospect for higher bank lending margins. Conversely, the rise in bond yields weighed on utilities shares, whose relatively high dividends became less appealing in comparison. A decrease in yields late in the week helped utilities stocks recover some ground but did not appear to derail the momentum in the financials sector.

U.S. companies are buying back their shares at a record pace, providing fresh support during what has been a rocky stretch for the stock market and many have rushed for the exits. S&P 500 companies have collectively bought $158 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. That is on pace to be biggest amount in any quarter, based on data stretching back to 1998. The buybacks have been fueled in part by the new tax law that is freeing up cash and encouraging companies to bring back money held abroad. The companies that have rolled out some of the biggest buybacks are Apple, Microsoft and JPMorgan Chase, among others.

After drifting sideways early in the week, the major domestic stock indexes began moving higher on Wednesday, although traders noted that a broad catalyst for the gains seemed conspicuously absent. Rather, small bits of good news in individual sectors seemed to drive the market higher, while the final trickle of first-quarter earnings reports continued to surprise mainly to the upside. By the end of the week, data and analytics firm FactSet was anticipating that overall earnings for the S&P 500 had grown by 24.9 percent in the quarter over the year before, with nearly four out of five companies beating analysts’ earnings and revenue estimates.

A rise in domestic crude prices provided a particular boost to the energy sector. The price of a barrel of West Texas Intermediate crude hovered above $70 for much of the week, the first time it had crossed that barrier since late 2014. Saudi Arabian officials were reportedly prepared to guide international oil prices to $80 per barrel, and the potential disruption to Iranian supplies also pushed prices higher. On Tuesday, President Trump announced his intention to withdraw from the Iranian nuclear deal and re-impose sanctions on the oil-rich country, but the action was widely anticipated and did not result in a wide swing in oil prices. Having been the second-weakest segment in the S&P 500 in 2017, energy shares closed the week among the index’s best performers YTD, trailing only tech stocks.

The rise in oil prices threatened to drive gasoline costs higher for the upcoming summer driving season, but the week also brought data showing that overall consumer price inflation remained subdued. Traders appeared to react favorably late in the week to news that core (excluding food and energy) consumer prices had increased only 0.1 percent in April. In particular, the news seems to have encouraged speculation that the Federal Reserve will raise rates in only two more quarter-point increments this year versus the three that many analysts had thought was increasingly likely. The yield on the benchmark 10-year U.S. Treasury note briefly broke through the 3 percent barrier for the first time since late April but ended only modestly higher for the week, at 2.97 percent.

Key European equity indexes also ended last week higher — buoyed by rising oil prices and positive corporate news — despite political uncertainty, particularly in Italy. Trading volumes were low, and reduced volatility reflected a relatively calm market. The pan-European STOXX 600 Index ended the week up about 1.6 percent, marking its seventh straight week of advances. As the first-quarter corporate earnings season also wound down there, more European companies than usual continued to surpass earnings estimates.

European traders seem to have become less likely to bid shares up or down in tandem of late. Rather, companies that beat earnings estimates have been rewarded, while those missing estimates have seen sharp declines. The weakening U.S. dollar penalized growth in the Eurozone overall.

In Asia, trade tensions between the U.S. and China remained in the news as both sides entered a second round of trade talks in Washington to try and head off a damaging trade war. The latest bilateral trade negotiations occur as the Trump administration is reportedly finalizing a list of Chinese products that it has targeted for punitive tariffs. Consistent with the U.S. and Europe, Chinese and Japanese stocks advanced for the week.

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