Trade Talk Dominates – For Now – June 22, 2018

Trade Talk Dominates – For Now – June 22, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Trade Talk Dominates – For Now

Stocks started out the week about where they left off, with tech stocks (FANGs) and small caps ignoring all risk in an attempt to lead the broader market higher. Microsoft’s plan to acquire autonomous systems software maker Bonsai AI Inc. was certainly a factor in the speculation. However, as usual, optimism was hampered by another round of proposed tariffs on Chinese goods ($200 billion) and a Supreme Court ruling that deemed it constitutional for States to collect taxes from commercial/retail internet activity. By late Thursday/early Friday, the high-flyers and the broader market had reached a low point, erasing most if not all of their gains from earlier in the week. OPEC’s success in obtaining a pledge to increase oil output that Iran will honor was this week’s only redeeming event. It had energy stocks breathing new life back into the indices by mid-morning Friday. Net, net – the major indices finished the week with some minor losses while the small cap indices added about a percent.

Like stocks, Treasuries were range-bound. The spread between the 2- and 10-year Treasuries widened about one bps to 36.0. Oil rallied in excess of 4% as OPEC’s decisions were seen as economically stimulating, while marginal weakness in the dollar kept the metals from freefall below the relevant moving averages. The industrial metals in particular (silver, platinum and palladium) have all suffered some indiscriminate selling in reaction to the tariffs. Aside from this, the economic data was sparse. Of what was released, the results were mixed. May housing data showed starts up 5.0%, permits down 4.6%, mortgage apps up 5.1%, and existing home sales down 0.4%. The leading index (for economic cycles) fell to 0.2% from 0.4%, also in May. And for June, the Philadelphia Fed Bus Index fell to 19.9 from 34.4, and the Markit US Composite Index (manufacturing and services) fell to 56.0 from 56.6 – an early indication that the indiscriminate consumer spending of April has begun to wane.

Next week, Trump’s tariffs will lead discussions at the EU Summit. He proposed a 20% tariff on autos imported from the region. Congress will debate and possibly vote on immigration, defense, spending, and marijuana. And we’ll get a slew of economic stats, to include, among other things, new home sales and first quarter GDP. The focus will likely be on the US consumer, whose recent strength has been the excuse behind the ongoing speculation in stocks. Again, that “strength” has been the result of several natural disasters/outbreaks countrywide, so it will be interesting to see how the markets react when this compulsoryspending is factored out of the economic equation.

Best Regards,

David Burgess
VP Investment Management


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