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Financial Markets Commentary For the week of June 25, 2018

Key Market Data

06/15/2018 06/22/2018 One Week Change YTD One Year
S&P 500 Index 2,779.66 2,754.88 -0.89% +4.00% +15.38%
MSCI EAFE Index 2,000.09 1,980.44 -0.98% -1.38% +8.44%
Barclays Capital U.S. Aggregate Bond Index 2,006.59 2,006.38 -0.01% -1.95% -1.25%
10-year Treasury Note Rate 2.921% 2.896% -2.5 basis points +49.0 basis points +74.7 basis points

The three major indexes were all down last week as investors tried to get a grip on the nature of the looming trade war – which countries will be involved, what products and services will be affected, and what sort of toll it will take on global growth. As a result, despite a rebound on Friday, the Dow fell 2 percent for the week, the S&P 500 dipped 0.9 percent and the Nasdaq, which hit a record high on Wednesday, lost 0.7 percent.

President Donald Trump continued to take an aggressive approach to trade, partly because of the strength of the American economy, with the unemployment rate down to 3.8 percent and the Federal Reserve Bank of Atlanta estimating gross domestic product (GDP) growth at a robust 4.7 percent for the current quarter. On Monday, Secretary of State Mike Pompeo indicated that the administration had no intention of standing down in its showdown with China after the president threatened to impose tariffs on up to $450 billion in Chinese exports (total Chinese exports to the U.S. were $505.5 billion in 2017). In Detroit, Pompeo accused China of an “unprecedented level of larceny,” adding, “It’s the most predatory economic government that operates against the rest of the world today.” The Chinese foreign ministry retorted that the U.S. was “abandoning all consensus” and “changing its mind constantly.” A second round of tariffs could hit consumer products made in China that haven’t been targeted so far, such as cellphones ($70.4 billion in 2017) and computers ($45.4 billion). One such product already impacted by U.S. tariffs is washing machines, whose price has gone up 17 percent since tariffs were imposed in January. Even so, there will be no additional tariffs until after hearings are held, which indicates there will be plenty of time for the two economic powerhouses to negotiate.

Late last week, the European Union responded to the tariffs on steel and aluminum with tariffs of its own on $3.2 billion of U.S. goods, including motorcycles and orange juice. In retaliation, Trump threatened to enact a 20 percent tariff on all European cars exported to the United States. Some of the world’s leading central bankers weighed in on the trade war from a meeting in Portugal. Mario Draghi, President of the European Central Bank (ECB), said, “It’s very worrisome,” and added that a trade war could lead the ECB to reconsider ending its qualitative easing in 2018, a step it announced the week before last. The Federal Reserve’s Chairman Jerome Powell said a trade war “could cause us to have to question the outlook,” and the Bank of Japan’s Governor Haruhiko Kuroda said the trade issues “were a matter of great concern.”

The ZTE deal

Even as he pushed for more punishing tariffs against China, Trump urged Congress not to overturn the deal he made to save that nation’s largest telecom company, ZTE Corporation, insisting that it was part of his larger negotiating strategy. The Senate has already moved ahead with a bipartisan vote of 85-to-10 to undo the deal, but will have to meet with the House to finalize the language for the bill. This gives the White House time to lobby against it.

OPEC and oil

The Dow ended an eight-day losing streak on Friday after the Organization of the Petroleum Exporting Countries (OPEC) increased oil output – but not to the extent expected. Despite disagreement among its members, OPEC said it would raise output by what’s expected to be about 600,000 barrels a day, but only because it has been over-compliant in hitting the production cuts designed to raise the price of oil. Because of sanctions and slowdowns, the cuts are estimated to exceed the target by about that same 600,000 barrels a day. Russia, which has pushed for further output, endorsed the deal, while both Saudi Arabia and Russia maintained that they weren’t giving into pressure exerted by President Trump, who has lobbied for increased production. After OPEC’s announcement, U.S. crude had its biggest one-day jump since 2016 (when OPEC first announced its cuts), up 4.6 percent.

Stress test success

The nation’s thirty-five largest banks handily passed the Fed’s latest round of stress tests last week, which means they’re free to pay dividends and buy back shares. The ease with which the banks passed may help the administration in its push to further undo the Dodd-Frank Act, prompting JPMorgan Chase’s chairman and CEO Jamie Dimon to say that we’re in “a golden age of banking.”

Goodbye GE, hello Walgreens; Disney ups the ante

GE, the last original member of the Dow and once America’s most valuable company, will be dropped from the index’s ranks this week to be replaced by Walgreens Boots Alliance. Over the last year, GE’s stock has tumbled 55 percent. The Dow was created in 1896, and Exxon Mobil Corporation, a member since 1928, is now the longest tenured company. The bidding war between Disney and Comcast for 21st Century Fox escalated last week, with Disney offering $71.3 billion in cash and stock after Comcast had offered $65 billion in an all-cash deal.

Greece moves on

Greece and its creditors reached a deal that will bring an end to that country’s long bailout, during which it has received $370 billion in assistance and was forced to implement unpopular austerity measures. As part of the deal, Greece will get a final payment, a ten-year extension on loans and a ten-year deferral on interest. Prime Minister Alexis Tsipras called it “a historic moment,” but also recently cautioned, “When you take a patient out of intensive care, you don’t make him run a sprint.” In other news, housing starts rose 5 percent in May to an annualized 1.35 million, the highest total since 2007. Starts were up a whopping 20.3 percent from last May. Building permits, however, fell 4.6 percent to an annual rate of 1.301 million. The National Association of Realtors reported that existing home sales were at an annualized rate of 5.43 million in May, down 0.4 percent from April and off 3 percent from May of 2017. And first-time jobless claims for the week ended June 16 dipped 3,000 to 218,000; the four-week moving average fell 4,000 to 221,000.

A look ahead

This week’s updates will include the latest on new and pending home sales, the S&P CoreLogic Case-Shiller Home Price Index, personal consumption expenditures, consumer sentiment and the revised estimate for first-quarter GDP, expected to remain unchanged at 2.2 percent.