Stocks managed to extend their recent gains, even with a shortened holiday week; the S&P 500 closed near its record high. All investors felt relief after the U.S. and China agreed to suspend new tariffs and resume negotiations with no specifics. While that was the expected course, the fact that the leaders were able to avoid further escalation of trade tensions and move away from heightened tensions was still viewed as very positive. Another positive emerged as 10-year government bond yields fell to their lowest levels in more than two years based on signs of slower U.S. growth and expectations of additional easing by the central bank.
U.S. stocks may have been the beacon that is leading the way, however international equities are also up double-digits this year, as well as small-cap stocks. Analysts suggest that as the cycle advances, well-diversified portfolios will be better positioned to navigate the swings and keep investors on track toward positive momentum.
Markets seem convinced that there is room for 2019 to continue to its end with a positive outlook. But they caution that there’s more bumps in the road ahead. The first half of the year’s highs in stocks and low interest rates, combined with last week’s data provide key takeaways: last week’s employment report showed that the U.S. economy added 224,000 new jobs in June, the strongest month this year and solidly above the 161,000 average so far in 2019. Monthly payroll gains averaged 223,000 for all of 2018, so the current slowdown in hiring raises fears that the U.S. economy is heading toward recession. The Fed’s apparent willingness to consider rate cuts in an effort to extend the economic expansion lends strong support.
The S&P 500 rose by a strong 17.4% (18.5% including dividends) in the first six months of 2019. Again, that’s the single best first half year since 1997. There has been a total of 10 years during the last 60 when the stock market returned more than 15% in the first half. For a full seven of those 10 years (70%), the market also posted a positive return in the second half of the year. The stock market finished positive for the full year in all 10 of those years averaging a 27% return.
Metals and Mining
Gold investors have to be enjoying this run as gold remains one of the strongest precious metals and continues on track for its seventh straight week of gains. As the week ended,
gold dipped over 1 percent on Friday, precipitated by the US dollar strengthening ahead of the release of US jobs data.
Analysts say they see the dollar a tad stronger and the euro weak, which usually holds gold back. Unfortunately, the readiness to push prices higher by speculators is also pretty limited.
Silver was down over 1 percent on Friday but could make a rebound based on indications that the Fed will cut interest rates later this month. Market watchers seem to remain positive about the silver, despite its current relatively stagnant nature. Analysts forecast that the silver price will average US$16.20 per ounce in Q4 of this year before rising to an average of US$17 in the fourth quarter of 2020. The other precious metals were mixed with platinum down nearly 2 percent for the week and palladium tracking as the only precious metal to make gains early in the session on Friday, ticking up 0.06 percent. As of 9:00 a.m. EDT, the metal headed for its fifth straight week of gains, trading at US$1,557 per ounce.
Energy and Oil
OPEC and allies gathered this week in what most felt was one of the least heated meetings in recent years, rolling over their production cuts into March 2020. This send signals that the oil market is still over supplied, and demand growth looks weaker for the balance of 2019.
If successful, OPEC’s mission to draw down excess inventories would lead to higher oil prices. Its cartel members need this action to balance their budgets, which are overly reliant on oil exports.
At the same time, higher oil prices are helping U.S. shale production to continue growing which is directly offsetting a lot of supply that OPEC is withholding from the market. OPEC and its Russia-led non-OPEC partners in the production cut deal are focused on reducing inventories and boosting prices. OPEC’s ‘free pass’ to U.S. shale is not expected to last long, according to JP Morgan. The cartel and its largest producer, Saudi Arabia will reclaim market share from U.S. shale, JP Morgan’s head of EMEA oil and gas research Christyan Malek reported to the media this week.
Natural gas spot prices fell at most locations this week. Henry Hub spot prices fell from $2.36 per million British thermal units last Wednesday to $2.32/MMBtu Friday. At the New York Mercantile Exchange, the July 2019 contract expired Friday at $2.291/MMBtu, up 2¢/MMBtu from last Wednesday. The August 2019 contract remained unchanged Wednesday to Wednesday at $2.268/MMBtu.
The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, and exporter-heavy German DAX index all rose throughout the week surrounded by increased hopes that the European Central Bank (ECB) will continue to provide monetary stimulus to keep the region’s economies moving forward. Both stocks and bonds got a bump after International Monetary Fund (IMF) Managing Director Christine Lagarde was nominated to be the next ECB president. Markets believe that she will continue the monetary policy established by current President Mario Draghi.
In Germany, data punctuated the cost that trade tensions mixed with slowing global growth have had on its export-dependent economy. German industrial orders were reported lower in all sectors, dropping 2.2% in May and for a total of 8.6% for the year. Overall, this is sharpest year-on-year drop of industrial orders since 2009.
Chinese stocks posted a weekly gain as a reaction of relief to a temporary cease-fire on tariffs struck by President Trump and Chinese leader Xi Jinping last week. The absence of any further specifics about when or how resumption will take place tempered optimism about long term solutions. The benchmark Shanghai Composite Index added 1.1%, and the large-cap CSI 300 Index, gained 1.8%. Chinese stocks rose immediately after Trump and Xi met at the G20 summit in Japan and agreed to restart talks alongside the U.S. suspending any new tariffs on Chinese goods.
The Week Ahead
It’s a relatively quiet week on reports with a few important indicators coming out including the NFIB small business index report on Tuesday, FOMC meeting minutes released on Wednesday and inflation plus weekly jobless claims reported on Thursday. The producer price index will also come out this week.
Key Topics to Watch
– May consumer credit report
– NFIB small business index report
– FOMC meeting minutes released
– Inflation numbers issued
– Weekly jobless claims report Thursday
– Producer price index
Markets Index Wrap Up