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Financial Markets Commentary For the week of August 13, 2018

Key Market Data

08/03/2018 08/10/2018 One Week Change YTD One Year
S&P 500 Index 2,840.35 2,833.28 -0.25% +7.21% +18.46%
MSCI EAFE Index 1,981.84 1,950.80 -1.57% -2.61% +4.50%
Barclays Capital U.S. Aggregate Bond Index 2,015.66 2,024.22 +0.42% -1.08% -0.62%
10-year Treasury Note Rate 2.950% 2.874% -7.6 basis points +46.8 basis points +67.6 basis points

The United States has been butting heads with a number of countries this year, notably China, Iran and Russia. But stocks at home and abroad fell on Friday because of friction with a new name on the list: Turkey. The turmoil brought an end to the S&P 500’s five-week winning streak and snapped the NASDAQ’s eight-day run in the black, both of which had been sustained by strong second-quarter earnings releases and robust economic reports on jobs and gross domestic product (GDP). The yield on the ten-year Treasury also fell on the news from Turkey on Friday as global investors sought the safety of American bonds.

President Donald Trump clashed last week with Turkey over an imprisoned American pastor, but there has been growing concern for that nation because of the policies of President Tayyip Erdogan which have led to political unrest, high inflation and concern that the Turkish government won’t be able to pay its considerable debt load. Late last week, the lira tumbled to a record low against the dollar after Trump threatened to double tariffs on Turkish steel and aluminum from 25 percent and 10 percent to 50 percent and 20 percent, respectively. Erdogan, meanwhile, said that his country would win the “economic war” and asked his citizens to exchange dollars, euros and gold to bolster the lira. That added up to a dismal day for stocks on Friday amid worries that the situation would spread from Turkey to other emerging economies.

China, Russia, Iran, South Korea and NAFTA

Turkey was not the only country in the news last week when it came to U.S. foreign relations. As expected, the Chinese said they will match the latest round of tariffs on exports put in place by the White House: 25 percent on $16 billion worth of goods, with tariffs of their own imposed on the same day, August 23. U.S. automakers have also been losing ground in China because of a reduction of tariffs on European and Japanese cars from 25 percent to 15 percent while the tariff on American-made vehicles was raised from 25 percent to 40 percent. Russia was hit with a new round of sanctions because of its use of nerve gas against a former Russian spy in London, sending the ruble plummeting to a two-year low against the dollar. Trump said he was re-imposing sanctions on Iran that were lifted after the 2015 nuclear pact. Other signatories of the deal, including the European Union, China and Russia, may continue to do business with Iran despite the threat of retaliation by the White House; China relies on Iran for oil. South Korea, one of the few countries to have recently negotiated a trade pact with the White House, said it would withdraw from the deal brokered in March if the United States imposes a 25 percent tariff on cars and auto parts. And on Friday, after tweeting that a deal with Mexico on the North American Free Trade Agreement (NAFTA) was “coming along nicely,” Trump warned Canada, “Will tax cars if we can’t make a deal!”

Corporate update: deals and departures

It was also a busy week on the corporate front. The Justice Department began its case to overturn AT&T’s recent $80 billion acquisition of Time Warner, a deal completed after AT&T won its court case in June. In the U.S. Court of Appeals for the District of Columbia, the government stated that the decision ignored “fundamental principles of economics and common sense.” Should the government win the case, which some analysts think may go to the Supreme Court, AT&T would have to undo the deal. Two other multi-billion dollar deals in the making fell through, however, with Rite Aid giving up on its acquisition of Albertsons and Sinclair Broadcast group dropping its plans to acquire Tribune Media. Indra Nooyi, who has been CEO of PepsiCo for 12 years, announced that she will step down in October; she will be replaced by the company’s current president Ramon Laguarta, who has worked for PepsiCo for 22 years.

Tesla tweets

Tesla, Inc. CEO Elon Musk created a ruckus last week after an early-morning tweet suggesting that he was going to take his company private at $420 a share, adding “Funding secured.” Tesla’s stock soared 11 percent on Tuesday, but by the end of the week it had fallen back close to where it started and there was a report that the U.S. Securities and Exchange Commission (SEC) was examining the timing and content of the tweet.

The deficit widens

In other news, the federal deficit increased 21 percent from the year before over the first ten months of the fiscal year that ends on September 30 to $684 billion because of last year’s tax cuts and higher spending. Last week, the government sold $28 billion in ten-year Treasurys, its largest ever one-day auction of ten-year debt. The Producer Price Index (PPI) was flat in July from the month before but up 3.3 percent year-over-year. Core PPI, less food and energy, rose 0.1 percent from May and 2.7 percent for the year. The Consumer Price Index (CPI) climbed 0.2 percent in July from June and 2.9 percent over the past year. Core CPI increased 0.2 percent from June and jumped 2.4 percent for the year, the biggest such gain since September of 2008. Average weekly earnings were flat July from June and up 3 percent from a year earlier, though slightly down when adjusted for inflation. Consumer borrowing rose at an adjusted annual rate of 3.14 percent in June, up $10.21 billion from the month before, the Federal Reserve reported. The Labor Department said there were 6.7 million job openings in June, a new record, while only 6.6 million Americans were looking for jobs. In addition, there were 6.7 million job openings on average for the three months that ended in June, the highest level for a quarter since 2001. Furthermore, in a sign of the health of the job market – and the difficulty companies are having finding qualified employees – approximately 3.4 million people quit their jobs in June, bringing the quits rate up 7 percent from last year. And first-time jobless claims for the week ending August 4 fell 6,000 to 213,000; the four-week moving average fell 500 to 214,250.

A look ahead

In addition to some of the last Q2 earnings reports, this week’s releases will include updates on small business optimism, import and export prices, retail sales, industrial production, business inventories, housing starts, consumer sentiment and the Conference Board’s leading economic indicators.