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Financial Markets Commentary For the week of May 29, 2018

Key Market Data

05/18/2018 05/25/2018 One Week Change YTD One Year
S&P 500 Index 2,712.97 2,721.33 +0.31% +2.58% +14.90%
MSCI EAFE Index 2,047.36 2,014.52 -1.60% +0.08% +9.91%
Barclays Capital U.S. Aggregate Bond Index 1,990.49 2,000.66 +0.51% -2.01% -0.59%
10-year Treasury Note Rate 3.057% 2.932% -12.5 basis points +52.6 basis points +67.6 basis points

The major indexes were up last week, but it was a close call. After a strong start Monday – because of what seemed to be a lull in the trade war – the indexes tailed off as investors were distracted by the on-again, off-again summit with North Korea. Another distraction included reports that Russia and the Organization of the Petroleum Exporting Countries (OPEC) might increase their oil output, which hurt the shares of energy companies. For the week, the Dow Jones Industrial Average gained 0.2 percent (and briefly moved back above 25,000), the S&P 500 gained 0.3 percent, and the Nasdaq gained 1.1 percent. The yield on the 10-year Treasury Note Rate, meanwhile, fell back below 3 percent.

Stocks began the week with a bang after reports that the United States and China – despite not having reached an agreement about trade – were putting off any new tariffs. With Commerce Secretary Wilbur Ross heading to Beijing this coming weekend to continue talks, both sides seem motivated to avert a trade war.

In addition, China is expected to finally announce its approval of Qualcomm’s $44 billion acquisition of NXP Semiconductors, which has been held up by Chinese regulators. President Donald Trump has said he plans to help ZTE Corporation, China’s largest telecom company, which has been crippled by a recent seven-year ban on buying American parts. Trump plans to rescind the ban – but also hit ZTE with a billion-dollar fine – and make it hire American compliance officers, among other steps. But members of Congress from both sides of the aisle were against helping a company that some see as a national security threat.

Beyond China, Trump is said to be looking into invoking national security laws to raise tariffs on imported cars and auto parts from Europe by 25 percent. Additionally, he is considering reducing European aluminum and steel exports by 10 percent. No timetable was announced for either step.

The Fed’s agenda

Stocks also moved up last week after the Federal Reserve Bank of New York released its May meeting minutes. The minutes indicated that, although the Fed’s benchmark rate was likely to go up in June, there would probably be a total of only three rate hikes this year, not four. The minutes also noted that inflation could rise above 2 percent for a “temporary period,” but “it was premature to conclude” that it would stay there. As for the trade war, committee members said, “The uncertainty surrounding trade issues could damp business sentiment and spending.”

The price of oil

Just when it seemed as if Americans might be paying $3 for a gallon of gas for the first time since 2014, the price of oil declined sharply late last week after ministers from Russia and Saudi Arabia raised the idea of increasing production. OPEC and non-OPEC members – including Russia – have been limiting production in attempts to bring back the price of oil, and the cuts have worked. Brent crude briefly passed the $80 a barrel mark in mid-May during intraday trading for the first time since 2014. U.S. crude hit a three-year high earlier last week.

Both OPEC and Russia had recently committed to continuing the cuts through at least the end of 2018, but that may change based on comments from the Russian and Saudi oil ministers. The latter, Khalid al-Falih, said Friday, “I think in the near future there will be a time to release supply.” The two sides apparently want to make up for production lost in Venezuela and Iran. Both sides have also reportedly concluded that, as long as the price of oil goes up, American drillers will continue to increase production. In addition, the U.S. Energy Information Agency reported that stockpiles were up 5.8 million barrels for the week ending May 18; the forecast had been for a drop of 2.2 million barrels.

Changes to Dodd-Frank

In a bipartisan vote, the House of Representatives approved a plan to tweak the Dodd–Frank Wall Street Reform and Consumer Protection Act, but it was not the overhaul that Trump and some of his supporters had hoped for. The bill will reduce regulations for small lenders and raise the amount of assets a lender had to have before stricter rules kicked in from $50 billion to $250 billion. It will not, however, strip the government of emergency powers, and will keep restrictions on derivatives in place.

Tumult in Europe

There was concern in Europe about a tumultuous summer because of political dramas unfolding in both Italy and Spain. Early last week, Italian President Sergio Mattarella gave the anti-establishment Five Star Movement party and the League party the green light to form a coalition government. It chose Giuseppe Conte, a lawyer with no government experience, as prime minister. But Mattarella rejected the new government’s choice for economy minister because he was anti-European Union. In the resultant chaos, Italians may end up going back to the polls only three months after the last election.

In Spain, the leading opposition party moved to oust Prime Minister Mariano Rajoy. This occurred after a court ruled that Rajoy’s party profited from an illegal kickback scheme, perhaps leading to new elections in that country as well.

In other news, new home sales declined 1.5 percent in April from March to an annualized rate of 662,000. Still, they were up 11.6 percent from a year earlier, and the average price rose to $407,300, the highest point since the government began tracking that data in 1963. Existing home sales fell 2.5 percent in April to an annualized rate of 5.46 million, according to the National Association of Realtors, and were down 1.4 percent from a year earlier. Both existing and new home sales have been slowed by rising mortgages, with the 30-year mortgage rate having recently hit a seven-year high.

Orders for durable goods were down 1.7 percent in April from the month before, mainly because of a 29-percent drop in orders for aircraft. New orders for nondefense capital goods excluding aircraft were up 1 percent. The University of Michigan Consumer Sentiment Index fell to a four-month low of 98 in May compared to 98.8 in April. And though first-time jobless claims were up 11,000 to 234,000 for the week ending May 19, the four-week moving average increased 6,250 to 219,750.

A look ahead

This week’s updates will include the latest on the S&P CoreLogic Case-Shiller

Home Price Index; the Conference Board Consumer Confidence Index; wholesale inventories; the second estimate for first-quarter gross domestic product (GDP), expected to remain unchanged at 2.3 percent; personal consumption; retail inventories; pending home sales; the Institute for Supply Management Manufacturing Index; and the jobless rate for May, forecast to stay at 3.9 percent.