Domestic stocks closed a quiet — felt like summer — week on Friday with the market’s recent upward momentum intact, although continued geopolitical uncertainty limited buying appetite with major indexes near records. North Korea returned to the forefront after the country’s foreign minister Ri Yong Ho said late Thursday at a United Nations meeting that his country might consider a nuclear bomb of “unprecedented scale” in the Pacific. While geopolitical tensions have been elevated, some analysts think the stock market has become desensitized to the threats posed by conflict on the Korean peninsula.
The major indexes closed last week generally mixed overall. The large-cap benchmarks were flat to modestly higher, with both the S&P 500 and the narrowly focused Dow Jones Industrial Average setting record highs early in the week before falling back a bit. The tech-heavy Nasdaq also hit new highs but ended the week down moderately. The smaller-cap benchmarks performed best for the week but stayed below the peaks they established in late July. Interest rate-sensitive utilities and real estate names performed poorly for the week as U.S. Treasury yields increased, and consumer staples shares also lagged. Energy stocks fared well as oil prices hit a three-month high, aided by increasing demand from refineries in the Gulf of Mexico coming back online. Financials also recorded solid gains on the increase in rates.
Some traders think that political developments continue to play a large role in driving sentiment, but there is no decisive directionality. Volatility was muted, and trading volumes remained subdued. Markets did not appear to react to President Trump’s strong words about North Korea on Tuesday, and the new threats in response from North Korea early Friday morning appeared to have only a limited impact when trading opened in New York, as noted above. Likewise, new Republican efforts to pass a health care bill (which took a hit Friday when Sen. John McCain (R-AZ) announced that he would not support the latest bill) seemed to have little broad impact, although health care services stocks — particularly those of companies heavily reliant on Medicaid clients — fell sharply on Tuesday before recovering somewhat.
Traders also kept a close eye on the Federal Reserve’s policy meeting on Wednesday, but the results of the meeting were largely in line with expectations. The Fed kept rates steady but announced that, beginning in October, it would reduce the amount of payments on its reinvested bond holdings. The Fed had little impact on stocks but yields on the benchmark 10-year U.S. Treasury note briefly touched their highest levels since early August following the meeting. An increased chance that the Fed will raise rates at its December meeting was partly behind the increase in yields, but some positive housing data may have also been a factor, with both August housing starts and new housing permits coming in above expectations.
The pan-European Stoxx 600 Index closed Friday a bit higher on the week. Eurozone economic data continued to show modest but steady improvement. Driven by strong results in France and Germany, the eurozone composite purchasing managers’ index, a common measure of economic activity, exceeded expectations and reached a four-month high. Consumer prices in the eurozone increased 1.5 percent year-over-year in August, the highest inflation reading since April and a modest increase over the prior month. Inflation is rising gradually, although it remains below the European Central Bank’s 2 percent target rate. Eurozone consumer confidence improved more than expected in September, according to the European Commission, and reached its highest level since April 2001.
German government bond yields largely tracked U.S. Treasuries directionally as Germans prepared to go to the polls on Sunday in federal elections. Ten-year German government note yields were somewhat higher for the week, finishing at around 0.45 percent. Angela Merkel’s Christian Democratic Union is widely expected to return as the largest vote-getting party, but pundits are uncertain if she will be able to garner the absolute majority necessary to form a government without coalition partners.
In Asia, Japanese stocks posted solid gains last week while the yen weakened and closed near ¥112 per U.S. dollar, which is about 4.2 percent stronger than at the end of 2016. After what had been a good week to that point, Chinese stocks fell on Friday after S&P cut its credit rating for China a notch to A+ from AA- over the country’s rising debt risk, an embarrassing setback for China’s government as it tries to preserve the appearance of economic stability before a key leadership transition next month. The decision marks S&P’s first ratings cut for China since 1999 and the second sovereign downgrade for China this year after a similar move in May by Moody’s.
“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P announced in a statement. Though China’s government has lately stepped up measures to curb rising corporate leverage that could stabilize risk in the medium term, “we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually,” the agency added.