Stock Markets

U.S. stocks reached new record highs, spurred by increased corporate earnings results and strong second-quarter GDP numbers. It appears U.S. economic growth slowed in the second quarter thanks to trade and business investment pressures, but consumer spending which has the greatest influence, beat estimates once again, coming in at 4.3%. The solid GDP report comes at an opportune time as the Fed is expected to cut rates next week. That’s in response to increasing risks from slowing global growth. The service sector of the economy, including big providers like Alphabet (Google), is holding steady, and alongside healthy consumer conditions, leads analysts to support the view that economic expansion will continue over 2019.

U.S. Economy

The U.S. stock market has gained 21.8% so far this year and the moves in Fed policy regarding interest rate cuts have helped. Stocks are driven by several factors beyond central bank actions. The momentum of the economy and corporate earnings serves as a guide for overall performance. Earnings announcements this week added perspective to the way ahead for the markets. They supported the fact that the economy is poised to grow but underscored potential threats. Strong trends in the financial and industrial sectors offer a good sign for the outlook. Analysts agree that sustained economic growth over the next two years would create a solid base for earnings growth, even if modest. That would extend the current bull market period.              

Metals and Mining

The metals and mining markets are as focused on the Fed announcement as any. It appears that the week can play out one of two ways — the Federal Reserve introduces a 25-basis point rate cut and gold consolidates, or the central bank doubles down on easing with a 50-basis point cut and potentially gold rallies to new highs, analysts suggest. Gold has traded between $1,430 and $1,411 this week but ended the session down 0.55% on the week. August Comex gold futures ended at $1,418.50. That was up 0.27%. Wednesday’s announcement will be a key factor. Markets are currently pricing in a 78.6% chance of a 25-basis point cut and a 21.4% chance of a 50-basis point cut (source: CME Group’s FedWatch Tool). Markets feel the Fed will begin its easing cycle, but it is more important to see if the central bank is headed on a major easing cycle.

Silver has moved 9.7% higher despite a mere 1.3% gold rally. That equates to a significant 7.4x upside leverage. This is being well received by silver enthusiasts. This outperformance is considered even more impressive because it was driven primarily by big capital inflows into SLV by American stock investors returning to silver.

Energy and Oil

Oil prices ended the essentially flat, based on demand fears and inventory draws offsetting each other. Again, geopolitical factors failed to change the market in either direction. However, fundamentals are certainly playing larger role in oil markets, since the geopolitical issues seem to be impacting pricing less and less. Large oil field services companies are indicating that the industry is going to feel more pain before things get better based on slowing drilling. They see further softening during the fourth fiscal quarter. That follows statements by big providers about similar concerns for contraction in the U.S. shale sector. Temperatures were higher than normal across the Northeast and Great Lakes regions after a heatwave at the beginning of the week. But by week’s end, most of the severe heat began to dissipate, adding downward pressure on prices. Temperatures across the eastern and central United States were generally lower than normal by the end of the week. Henry Hub spot prices fell 16¢ from $2.38/MMBtu last Wednesday to a low of $2.22/MMBtu a week later. At the Chicago Citygate, prices decreased 25¢ from $2.26/MMBtu last Wednesday to a low of $2.01/MMBtu at the same time last week.

World Markets

Markets in Europe rose over all, lifted mostly by positive earnings reports and again supported by indications from the European Central Bank (ECB) that more monetary stimulus will take place. The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, German DAX, and Italy’s FTSE MIB Index all headed higher on the week. The euro fell against the dollar. That came after the ECB kept rates steady but indicated it is willing to cut short-term rates for the first time since 2016. The signal is a significant major policy shift aimed at protecting the European economy. ECB President Mario Draghi didn’t help much, stating that the economy is getting “worse and worse,”.

Chinese stocks advanced as traders in anticipation of high-level trade talks with the U.S. next week. The benchmark Shanghai Composite Index added 0.7% and the large-cap CSI 300 Index, gained 1.3% for the week. U.S. and Chinese negotiators are schedule to hold trade talks in Shanghai on July 30 and 31, the first such talks since negotiations broke down in May.

The Week Ahead

All eyes will be on the actions of Fed this week in what promises to be a very active week of reporting. Earnings will also be a big part. One-third of the S&P 500 companies are scheduled to report second-quarter earnings. The Federal reserve is fully expected to cut rates for the first time since the Financial Crisis of 2008. Other key economic data emerging next week includes consumer spending, the ISM Manufacturing Index, July’s jobs report, and the trade deficit figures.

Key Topics to Watch

–           S&P companies reporting

–           Consumer spending numbers

–           Consumer confidence index

–           ADP employment

–           Fed rate announcement released Wednesday

–           Construction spending for June

–           ISM manufacturing index

–           July Motor vehicle sales

–           Unemployment rate released Friday

–           Trade deficit for June

Markets Index Wrap Up

Stock Markets

The S&P 500 rallied 4.4% as stocks finished higher for the best weekly gain in the last six months. However, bond yields declined to the lowest levels in nearly two years. Increased expectations of a Fed rate cut, positive response to the U.S. and Mexico reaching a resolution to avoid tariffs, and improved valuations, all helped stocks move higher.

In terms of economic data, signals were mixed with strength from the services sector mostly offset by weakness in the manufacturing sector. While job gains for the month of May came in below expectations, the unemployment rate is still very healthy at a 50-year low. Analysts expect a more balanced mix of positive and negative moves this season and feel confident about rising corporate profits, strong economic growth, combined with low interest rates creating a positive fundamental base that outweighs risks.

This also offers an opportunity to enhance diversification. Reviewers call for appropriate global stock-market allocations, with diversification across asset classes, including small- and mid-cap stocks, that will likely benefit from increased trade fears or renewed economic signals.

U.S Economy

There remains continued evidence of a slowdown in the U.S. economy, which in turn boosted hopes for a turn in Fed’s policy. Numbers from ADP showed that private sector payrolls had grown by the smallest monthly amount in over nine years for the month of May. Alongside that news, the Labor Department reported overall, payrolls had expanded by only 75,000 in May. The saving grace: May’s unemployment rate held steady at of 3.6%, its lowest in five decades. Almost immediately after the figures were issued, futures markets began pricing in over a 98% probability of a rate cut in 2019, which they say has a 90% chance taking place by July (source: CME Group data).

Economist suggest that ultimately, the determination of whether the economy continues to grow or falls into recession will be determined by the labor market and household spending. By most estimates, these are expected to remain healthy enough to support moderate GDP growth this year. This is heavily weighted in favor of the still-healthy labor market that is driving several key metrics.

Mexico On Hold

Expected tariffs planned to come into effect on June 10th were averted in a last-minute deal reached between the U.S. and Mexico. In a joint declaration released by the U.S. state department, the two countries said Mexico would take “unprecedented steps” to curb irregular migration and human trafficking.

The U.S. did not however, get one of its key demands that would have required Mexico to take in asylum seekers heading for the U.S. and process their claims on its own soil.

Mexico agreed to:

• Deploy up to 6,000 additional troops along Mexico’s southern border with Guatemala using its National Guard beginning Monday
• Take “decisive action” to tackle human smuggling networks

The US agreed to:

• Expand its program of sending asylum seekers back to Mexico while they await reviews of their claims.
• “work to accelerate” the adjudication process

Both countries have offered pledges to “strengthen bilateral co-operation” over border security, including what they have called “coordinated actions” and information sharing.

These actions, while not inferring a long-term solution, have arrested the immediate actions of the intended tariff going into place and offered some signs of confidence that the two parties can work out terms that will give the markets breathing room.

Metals and Mining

The precious metals markets were given a lift this week by geopolitical issues that continue to plague investors who then seek out the metals as safe havens. At the forefront was the gold market, which saw its best weekly performance in more than a year. Some leading analysts have predicted that the precious metal has enough momentum now to snap the critical long-term resistance barrier in the near-term. Lower U.S. employment growth helped push gold prices back to within close breaking distance of the all critical $1,350 level. During the week, August gold futures traded at $1,347.10 an ounce, up 2.7% compared to the previous Friday.

Gold faces some strong technical headwinds. Since hitting its 2015 low, it has tested resistance at or near $1,350 a total of eight times. Silver is taking some signals here, following gold’s lead on Friday. It added gains on the back of ongoing geopolitical concerns too, trading just under the US$15 per ounce level on track for its best week since late January. The others in the precious group were also up: platinum was up close to 1 percent for the week and on track for its first weekly gain in the last seven weeks. Palladium also climbed, edging up 1.05 percent for the week. As of 10:05 a.m. EDT Friday, palladium was trading at US$1,346 — a gain of close to US$20 from the previous week.

Energy and Oil

Once again, energy shares lagged, weighed down by continued weakness in oil prices, and the typically defensive utilities and real estate sectors also underperformed. Oil futures climbed for a second straight session Friday, with U.S. prices erasing their loss for the week just two days after dipping into a bear market. Natural gas spot prices fell at most locations this week. Henry Hub spot prices fell from $2.63 per million British thermal units (MMBtu) last Wednesday to $2.39/MMBtu. Temperatures were close to normal across much of the Lower 48 states, with warmer-than-normal temperatures in the Pacific Northwest and cooler-than-normal temperatures in the Southwest and Northeast. At the Chicago Citygate, prices decreased 22¢ from a high of $2.43/MMBtu last Wednesday to $2.21/MMBtu yesterday. Traders will be watching updates on a production-cut agreement between the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers ahead of the deal’s expiration at the end of this month.

World Markets

European stocks rose as investors began pricing in expectations for rate cuts as both the U.S. Federal Reserve and the European Central Bank (ECB) indicated that they could possibly intervene if trade tensions hit the global economy. The pan-European STOXX Europe 600 Index and the UK’s FTSE 100 Index gained more than 2%. The exporter-heavy German DAX Index and Italy’s FTSE MIB Index both gained almost 3%. Germany, which leads European economies, reported that its Bundesbank data showed weak exports are taking a toll on the German economy and cut its economic output forecast to 0.6%, down from 1.6% in December. The central bank also slightly lowered forecasts for 2020 and 2021. Meanwhile, signs of China’s slowing economic growth continued to accumulate. Clearly this is raising hopes for stimulus from Beijing. The International Monetary Fund trimmed its 2019 growth forecast for China to 6.2% from a prior 6.3% estimate and projected 6.0% growth next year.

The Week Ahead

This coming week is a relatively light week for reporting, but some areas to focus on include inflation numbers to be released on Wednesday, along with May retail sales and consumer sentiment reported this coming Friday.

Key Topics to Watch

–           Mexican Tariffs relaxation

–           China Trade War changes based on Mexico

–           U.S. Retail Sales Report for May

–           U.S. inflation figures reported by the Fed

–           Gold to test the $1350 per ounce mark

Markets Index Wrap Up