Optimism engulfed the US equity market over the past week in anticipation of the G20, mainly the meeting between Trump and Xi, surprise surprise the trade talk.
The US and Trump announced that they are hopeful and optimistic that trade talks remain on the table and negotiations are further moved along. The market hinted at such a deal as a brisk rally into all time highs met the month of June.
The rally in equities seems to be news driven as both G20 speculation and Fed speculation lead to greed while the US economic data continues to come out weak. Manufacturing data out of the US feel and the Fed was quick to act. There were talks about rates cuts not too long ago, which brought about a 80% chance of a 25 basis point cut in July. This week Fed Chair Powell took to the stage along with member Fed speakers.
The recent announcements from the Fed called for a less mega dove vote, however they are still willing to cut rates should they need too. The Fed stressed data and want to see more economic data before making a decision.
Central banks also were in the news this week as inflation targets missed however have improved slightly. Overall US equity markets took a net loss on the week with the S&P 500 & NASDAQ falling 0.3% and the Dow Jones falling 0.5%. Weakness in the dollar pushed the index into the 96 level, strong support from last week’s FOMC meeting and the uncertainty of trade talks post G20 meeting sees the US 10-year muted at the 2% level.
Crude oil makes gains this week as the OPEC meeting and crude oil inventories screamed “BULL”. Crude inventories came out as the largest US draw down in over a year and OPEC and non-OPEC members are anticipated to begin production cuts in the following month.
More specifically next week when they meet. Will that be the case or more OPEC jawboning to get expensive oil? We’ll let you know next week.
Here is a look of last week’s stock market on a daily basis (red vertical lines split days).
Stock Market and Sector Overview
Here is a break down of the weekly performance in various stock market sectors (top chart):
Energy stocks up 0.22%
Technology down 0.28%
Financials up 1.43%
Retail up 0.14%
Utilities down 2.15%
Overview of key markets last week (bottom chart):
Crude oil up 0.38%
S&P500 down 0.15%
Silver was down 0.62%
Gold up 0.38%
US dollar up 0.09%
Back to the table, Xi and Trump talk trade deal.
It finally came to be, the long anticipated G20 meeting in Osaka, Japan. To get to this point there was much turbulence between Trump and Xi in at which there was a point where it was vowed that neither would meet for further trade discussions.
After the meeting between The US and China, Trump said “We’re right back on track and we’ll see what happens next”. Indicating a revival of trade talks between the two nations. They managed to avoid the worst case and further tariffs that were announced were set on hold, not moving the current ones set in place. Trump noted that there will be an easing in Huawei restrictions, letting everyone know that America will be allowed to sell components to the worlds larger telecom network gear maker; and a cease fire in tariff bombs. There still comes the question of the ban list, on which Huawei is put. Will it be removed and therefore allowed to buy from US producers without government permission? US producers for microchips and other tech that Huawei purchases are also enthralled that their business can continue and grow at that. Xi and Trump have agreed to keep Huawei talks for the end of the trade deal agreement. However there are many appalled by Trumps leniency towards Huawei restrictions, because they do pose a threat to national security and Trump brushes it off easily.
The meeting resulted in a stall on tariffs on all remaining Chinese exports to the US, which is in the sum of $300 billion in goods. Trump managed to give some vagueness to the media about the meeting in which he mentioned the importance of a deal going through and he has not come to one because he wants to get it right for generations to come. He also mentioned that in addition to being more lenient on the coming tariffs, China agreed to purchase US agricultural goods, none of which have been specifically mentioned. One pivotal component that remained a mystery is would Xi be willing to remain open to the previously discussed components of the trade deal while the nation was close to reaching a deal?
The final coming together between the worlds two greatest economic powers after 6 weeks has reduced some of market fear. The announcement that the two would meet at the G20 has helped US equity markets rally significantly letting a lot of investors breathe. It is still unclear where the trade negotiations are going considering that they do not look to have changed that much to the public eye, from last rounds truce. Last time around, when talks collapse, Trump raised tariffs to 25% from 10% on $200 billion worth of Chinese goods. There is still fear that should trade talks fail again, there will be tariffs on all Chinese goods. However should actual steps towards a real deal be made, economies and markets would rejoice for the time being. Another area of concern is the utter differences that Xi’s China and Trump’s US had with the wording of the last agreement which remains a core issue. Xi mentioned that he and his nation are willing to come forth, but at a reasonable stance, one that he feels Trump has not shown yet.
The positive progression of the trade talks this past week helped the US Fed’s independence. With some fear being lifted from markets and economic data optimism the Fed may not be pressured to cut rates in July by as much as 50 basis points or half a percent. This would result in a shift in the current monetary policy and unrivaled equity bullishness. However to the flip side of this should the Fed remain on hold, as they recently did, the sharp downside could open up in US equities. Over the past weeks dovishness, US equities markets rallied into all time highs while the greenback slipped helping safe havens like Gold and the Japanese Yen rally significantly.
Weekly Economic Calendar
All eyes on OPEC this week as we anticipate production cuts to be announced and a spike higher in the crude oil market. We’ve got quite the shortened week out of the US in observation of Independence Day. A half day on July 3rd (in the futures market) and a full market closure on July 4th. The end of the week is the first Friday of the month and you know what that means, non-farm.
Sunday, Caixin Manufacturing PMI out of China
Monday, OPEC meetings begin, and ISM manufacturing PMI data out of the US.
Tuesday, Rate decision and statements out of Australia and the RBA. This will move the Aussie dollar without fail. Building approvals out of Australia as well.
Wednesday, trade balance data out of Canada, ISM non-manufacturing PMI out of the US and retail sales out of Australia.
Thursday, no high impact data.
Friday, employment data out of Canada and the US which will shake up US equity markets.
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