Weekly Market Update: Global Equities Shift Lower, China Data Release to Provide Gauge on Economy
Last Week Review
Renewed trade concerns helped drive global equities 2.5% lower and temporarily inverted the U.S. yield curve at the three-month and 10-year tenors. Emerging market equities declined the most of the major regions falling 4.4% and drove the year-to-date return to 7.2%, the lowest of the major regions. Global equities are up 13.3% for the year led by U.S. equities.
Trump’s Trade-Related Tweet Rattles Markets
U.S. President Donald Trump tweeted early last week that the U.S. was increasing tariffs from 10% to 25% on $200 billion worth of Chinese goods and potentially implementing tariffs on all goods imported from China. Trump’s threat was prompted by China’s backtracking on trade promises. The U.S. followed through with Trump’s threat, raising tariffs on Friday and began the process of implementing tariffs on the remaining imports from China. China vowed to retaliate with details likely to emerge over the upcoming days. Economists estimated that the current duties were a 0.5% detractor to Chinese growth and that the latest duties will increase that figure to 0.9%. Economic data in China has been mixed with 4% year-over-year growth in imports and 2.7% year-over-year decline in export growth. China’s credit growth also fell below all economists’ expectations for April. Investors will follow the data prints closely to see if China’s stimulus can offset the negative impact associated with the tariffs.
Markets Show Probability of Rate Cut by Year End
Markets were widely expecting a rate cut by year end despite Federal Reserve Chairman Jerome Powell focus on the possibility that recent soft inflation readings were merely transitory at his recent press conference following the Federal Open Market Committee, further adding that the Fed didn’t see a reason to adjust interest rates higher or lower any time soon. Some Fed officials like Chicago Fed President Charles Evans, sees persistently sluggish inflation and lower than expected prints as a reason to cut rates. Headline consumer price index measures posted on Friday with the headline number falling short of expectations at 2.0% year-over-year. Another missed inflation print combined with the increased volatility from the trade escalation has pushed markets to expect a cut by year end with 59% probability.
Ride-Sharing Competition Intensifies on Public Market
Investors will now have better insight into the competition between Lyft and Uber as both companies — now publicly listed — will be reporting quarterly earnings going forward. Investors will be focused on how the two companies balance turning a profit with reinvesting into the business to grow market share overall revenues. Looking at the broader U.S. market, 450 S&P 500 Index companies (90%) have reported earnings growth of 1.7% and sales growth of 4.8% year-over-year. Earnings growth has consistently surpassed expectations while revenue growth has met analysts’ forecasts.
This Week Preview
Deere & Co., Walmart to Release Earnings
The majority of the companies left to report first quarter 2019 earnings will report out of the consumer discretionary sector. Through last Friday, the sector has surprised analysts’ expectations the most by posting the second best earnings growth numbers. Communication Services leads all sectors with 13.6% year-over-year earnings growth. Notable companies releasing earnings include Deere & Co. on Thursday and Walmart to cap off the week on Friday.
Chinese Data Release to Provide Gauge on Economy
China will release data on fixed asset investment, industrial production and retail sales that are expected to show healthy increases from the prior year. Strong readings may provide investors insight on China’s ability to handle pressure from the U.S. on the tariff front. As China responds to U.S. tariffs in the near future, certain U.S. industries may need to adjust strategy.
Trump Likely to Delay Auto Tariff Decision
The Commerce Department set a May 18 deadline for Trump to decide on whether he would like to move forward with a 25% tariff on automobiles from Japan and the European Union. The president delayed the decision last year and said he will not implement the tariff if talks were progressing smoothly. Automakers expect another deadline delay of 180 days. If he announces a date to charge taxes on imports of automobiles, markets will likely respond negatively and add to the U.S./China trade negotiation induced market volatility.
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