Market Update - July 5, 2019

On a shortened trading week, U.S. stocks fared strongly, for the most part due to strong early sentiment on the heels of a partial truce in the U.S.-China trade war. Additional tariffs on hold for now, U.S. tech manufacturers can continue to supply Chinese telecom giant Huawei for now, while the Chinese have committed to purchasing greater amounts of U.S. agricultural products. However, it seems a good deal of work on a final deal is still required and the timeline remains wide open. In another market conundrum, stock prices tempered somewhat in response to a very strong employment situation report (normally good news, one would think), which implied lowered chances and magnitude of now-expected interest rate cuts by the Fed. Naturally, it’s hard to make everyone happy.

By sector, communications services, technology and consumer staples all rose well over 2% on the week to lead the way, while energy was the only sector to lose ground for the week, down -1%. Earnings expectations and actual results are likely to take precedence in coming weeks, with overall earnings for Q2 assumed to be a negative -3% year-over-year. While two back-to-back earnings decline quarters sounds severe, it happened in 2016, so it’s not all that uncommon.

Foreign stocks also earned strong returns in local currency terms, although these translated lower than those in the U.S. due in part to a 1% higher dollar, which served as a headwind. Japan fared best, followed by Europe, while emerging markets were generally flat. European equities were boosted by the U.S. China trade sentiment, and continued likelihood of ECB stimulus to spur growth. Yields fell in keeping with market approval of the potential appointment of IMF managing director Christine Lagarde as ECB president, which raises the apparent chances of a continued easy policy regime. Additionally, the EU decision to not pursue an ‘excessive deficit procedure’ against Italy following the latter’s submission of an adjusted budget, represents the removal of an additional element of uncertainty weighing down lack of cohesiveness on the continent. Emerging market members Brazil and Turkey experienced rallies, due to idiosyncratic events, including progress on problematic pension reform for the former and apparent tempering of inflation as well as improved relations with the U.S. for the former.

U.S. bonds fell back a bit, as interest rates ticked higher along the yield curve—driven mostly by the strong employment situation report on Friday. Investment-grade corporates declined to a lesser degree than treasuries, due to the yield buffer, while high yield and bank loans gained a bit of ground on the week. Developed market government bonds continued to hit new all-time lows in yield, but lost significant ground on net due to a sharply higher U.S. dollar during the week. However, emerging market USD and local debt each gained as credit spreads continued to contract.