06/26/2018
Another week of trade threats and promised retaliation kept investors off stride and markets adrift. The S&P 500 shed 0.9 percent, its first weekly decline in the past five. Trade jitters were even less kind to the Dow Jones Industrial Average, however. Owing to its constituents’ greater exposure to foreign trade, the Dow fell 2.0 percent last week, its third decline in the past four weeks. And only a modest bounce on Friday prevented the Dow from dropping for nine straight days.

Stocks in the Eurozone remained under pressure as well. The EuroStoxx 50 index slumped 1.8 percent in local currency terms, its fourth decline in the past five weeks. And the pain would have been measurably worse if not for a nice rally on Friday after stronger than expected preliminary Purchasing Managers’ Index (PMI) data for June, which helped to temporarily alleviate concerns of a prolonged economic slowdown to start the year, as well as a rally in energy shares.

Stocks rose in Canada last week, and fell in Mexico. But among the countries in the cross hairs of U.S. trade policy, the sharpest pain was felt in China, where the Shanghai Composite index fell 4.4 percent. The index has now declined for five straight weeks and has fallen 9.5 percent in the process.

Friday’s equity rally was led by the energy sector following a decision by OPEC and friends to increase production. Initially judged to be a smaller increase than expected, the price of crude rose sharply. West Texas Intermediate surged more than $3 a barrel on the news, while Brent crude oil climbed $2.50. How much of the bounce actually sticks remains to be seen, but the Saudi oil minister subsequently attempted to convince markets that the 1 million nominal increase was real and would help moderate the recent rise in price.

Bond Yields Signal Additional Rate Hikes to Come

Bond yields continued to reflect the prevailing view that although inflation remains under control, the Fed intends to continue raising rates. The ten-year note yield fell 2 basis points on the week to 2.90 percent, while the two-year note fell one to 2.55 percent. The net result was a further incremental flattening of the yield curve to 35 basis points, its narrowest spread since August 2007.

Fed chair Powell reiterated his outlook for future rate hikes at a meeting of central bankers in Portugal last week, saying, “The case for continued gradual increases… remains strong.” High yield credit spreads widened somewhat last week, but remain tight. The spread between the Bank of America Merrill Lynch High Yield index and the ten-year Treasury increased six basis points to 333, leaving it just ten basis points wider than its low for the year in late January. BBB corporate spreads have been a different story, however. They, too, widened six basis points last week, but at 159 basis points are now 44 above their February low.

The Strong Economy vs. the Strong Dollar and Trade Tensions

The second quarter comes to a close this week, and the standoff between a strong economy on one hand and the influence of a stronger dollar and rising trade tensions on the other was felt throughout. With one week to go, the S&P 500 has climbed 4.3 percent in the quarter, a solid turnaround from the 1.2 percent decline in the first quarter. But smaller stocks have been the real star domestically, in part owing to their relative insulation from foreign trade compared to larger companies. The Russell 2000 index has climbed 10.2 percent since March, a dramatic reversal from its -0.4 percent first quarter loss.

Overseas, the EuroStoxx 50 index has risen 2.4 percent in the quarter in euro terms, but those gains turn into a loss of 3.0 percent in dollars, as the euro fell 5.4 percent against the dollar to 1.165. The currency influence was also seen among emerging markets stocks, as the MSCI Emerging Market index fell 3.1 percent in local terms in the quarter, but fell 7.0 percent in dollars. The second quarter has not been very kind to bond investors, either. The Bloomberg Barclays Global Aggregate index is down 2.9 percent in the quarter in dollars, while the U.S. index has dropped 0.5 percent.

The latest reading on inflation headlines this week’s economic calendar. The Personal Consumption Expenditures (PCE) deflator report on Friday is expected to show another modest rise from the April report, to 2.2 percent year-over-year at the headline level and 1.9 percent at the core. Anything hotter than that will surely get the attention of both investors and the Fed. Personal income and spending for May are expected to show solid gains. Durable goods orders, new home sales and consumer confidence and sentiment readings round out the schedule. Banks will find out this week whether their capital deployment plans have been approved, following last week’s passing grades in the Fed’s stress tests. And at the week’s end, China reports its PMI surveys for June and some moderation is anticipated.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Past performance is not a guarantee of future results.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
OPEC is a permanent intergovernmental organization of 14 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide.
The Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
The Russell 2000® Index is a market-capitalization-weighted index made up of the 2,000 smallest US companies in the Russell 3000.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
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Indexes are unmanaged and are not available for direct investment.
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