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Financial Markets Commentary For the week of May 13, 2019

Key Market Data

05/03/2019 05/10/2019 One Week Change YTD One Year
S&P 500 Index 2,945.64 2,881.40 -2.18% +15.77% +7.97%
MSCI EAFE Index 1,918.81 1,865.10 -2.80% +10.37% -5.49%
Barclays Capital U.S. Aggregate Bond Index 2,106.01 2,112.58 +0.31% +3.22% +5.71%
10-year Treasury Note Rate 2.526% 2.468% -5.8 basis points -21.7 basis points -49.5 basis points

Stocks spent the week on a wild ride, buffeted by trade winds — tariffs, tweets, and blustery rhetoric about a trade pact with China. The trade talk not only sent the S&P 500 to its worst week of 2019, off 2.2 percent, but also impacted the price of oil, Treasury yields, and, some speculated, Uber’s IPO. The president of one of the Federal Reserve’s banks even indicated that the fallout from a trade war could result in a rate cut.

Last Sunday, days after the U.S. trade delegation left Beijing and days before their Chinese counterparts were due to arrive in Washington for further talks, President Trump accused China of backtracking on some details of a trade deal that had already been agreed to. During the week, U.S. Trade Representative Robert Lighthizer referred to an “erosion in commitments” and Treasury Secretary Steven Mnuchin agreed that negotiations had moved “substantially backwards,” but that there was time to “get back on track.” President Trump was blunter, saying that China had “reneged.” He pledged to raise the tariffs on $200 billion in Chinese goods from 10 percent to 25 percent on Friday, which he did, while also moving toward imposing new tariffs on another $325 billion of goods, essentially taxing everything else that China sells in the United States. Some believed that China had reneged because it had interpreted Trump’s push to get the Fed to lower its rate as a sign of weakness. Whatever the reason, the war of words was on, and stocks would rise and fall throughout the week based on the latest rumors and reports. For instance, on Tuesday, when the Dow shed 437 points, it was down as many as 638 points during the day, and on Thursday, when it lost 114 points, it had fallen 450 points in intraday trading. The Dow finished in the black on Friday after both President Trump and Mnuchin referred to the session with China that ended that day as “constructive.”

On Friday, President Trump also said that the White House would come to the rescue of farmers hurt by the trade war by using money generated by the tariffs to buy, produce and ship their products to countries in need of humanitarian aid. China, for its part, pledged to retaliate by taking “necessary countermeasures.” There’s some question about what China’s next steps could be given the fact that it imports far fewer U.S. goods than it exports and that its economy has already been hurt by U.S. tariffs. In fact, on a year-to-date basis, imports from China to the U.S. have fallen 13.9 percent from a year earlier. China’s lead negotiator Vice Premier Liu He chose his words carefully when he left Washington on Friday, saying that the two sides had “encountered unavoidable complications,” but adding, “Negotiations have not broken down.” Trump said he still had a “very strong relationship” with China’s President Xi Jinping and that “conversations into the future will continue.” Xi and Trump will attend a Group of 20 meeting in Japan in June at which they may discuss the progress of the trade talks and a future summit.

Bostic weighs in

Meanwhile, one member of the Federal Reserve also weighed in on the trade talks last week when Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said that the Fed might consider lowering its rate if a trade war led to a decline in consumer spending.

Uber fizzles

Uber’s long-awaited IPO did not get off to a good start on Friday. The company chose to price its shares at $45, the lower end of its target range and well below what had been floated a year ago. Even so, perhaps because of the stock market’s concerns about the trade talks, the stock fell 7.6 percent on Friday to $41.57. Uber ended the day with a market valuation of $76.5 billion. The stock of Uber’s rival Lyft fell 7.4 percent on Friday, and it has now dropped 29 percent since its IPO in March.

A win for Occidental

After Occidental received the backing of Berkshire Hathaway’s Warren Buffett, Chevron pulled out of the bidding war for Anadarko Petroleum. Occidental closed the deal by offering more cash as part of its $38 billion offer while Chevron, which had originally bid $33 billion, was content to walk away with $1 billion break-up fee it had negotiated with Anadarko in the event that the deal fell through.

Oil prices fall again

The price of U.S. crude declined for the third week in a row as the trade talks raised doubts about global demand. The price is now down 17 percent from its 2019 high. However, some analysts think tightening sanctions on Venezuela and Iran may push prices back up in the coming months.

In other news, the consumer price index was up 0.3 percent in April from March, mostly because of higher prices at the pump, CPI is up 2 percent for the year. Core CPI, less food and energy, rose 0.1 percent for the month and 2.1 percent for the year. The producer price index advanced 0.2 percent in April from March and 2.2. percent from a year earlier; core PPI increased 0.1 percent month over month and 2.4 percent for the last twelve months. The trade balance rose 1.5 percent in March to $50 billion from a revised $49.3 billion in February and, for the first four months of the year, the trade gap is up 3.7 percent or $5.8 billion from a year earlier. Exports increased $2.1 billion from the month before while imports rose $2.8 billion. The trade deficit with China narrowed 16.2 percent to $20.7 billion, down $13 billion from a year earlier to its lowest total since 2014. Wholesale inventories declined 0.1 percent in March from February and were up 6.7 percent from a year earlier. And first-time jobless claims for the week ending May 4th fell 2,000 to 228,000; the four-week moving average rose 7,750 to 220,250.

A look ahead

This week’s releases will include the latest on small business optimism, retail sales, industrial production and capacity utilization, business inventories, housing starts and building permits, the Conference Board’s leading index, and consumer sentiment.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.