The equity markets rose last week with the announcement that Presidents Trump and Xi would meet at next week’s G20 summit in Japan. Trade officials from both countries will meet before the summit to discuss a potential framework to restart negotiations. Meanwhile, the Federal Reserve, as widely expected, left interest rates unchanged but confirmed its commitment to “act, as appropriate, to sustain the expansion.” The Fed also removed the term “patient” in characterizing its outlook. For the week, the Nasdaq led all indices with gains of 3.01%, followed by the Dow Jones Industrial Average (+2.41%), S&P 500® Index (+2.20%) and Russell 2000® Index (+1.78%).
Economic data this week were mixed; a slowdown in manufacturing data revealed the uncertainties related to future tariffs. Companies including Apple are discussing with suppliers the need to potentially shift manufacturing away from China to mitigate tariff risk. Weakening demand as well as decisions to relocate production away from China have impacted industrial production in the PRC. Existing home sales data improved as lower interest rates have spurred home buying and refinancing. Some observers believe that the Fed may reduce interest rates as early as July while others anticipate “close monitoring” in light of growing “uncertainties” but little action.
Oil prices continue to recover in the wake of last week’s attacks on two tankers in the Strait of Hormuz and last week’s downing of an unmanned U.S. drone in the same area. President Trump seemed to back away from retaliation against Iran for the drone attack. The immediate upshot is dramatically higher insurance costs for oil shipments through this important channel; also, companies are also reluctant to put crews and assets at risk amid rising tensions. OPEC members agreed to meet in early July; analysts expect a recommitment to the supply cuts agreed upon earlier this year.
Trade issues, and Fed monitoring, have dominated the market over the past month. Few observers anticipate any significant developments before next weekend’s G20 summit. Recently, the equity markets have remained resilient; the shift in Fed commentary may explain the sharp contrast to last December’s abrupt selloff. Investors tend to focus on the federal funds rate. The Fed, though, has several other economic levers; for example, the Fed, in order to spur liquidity by encouraging bank lending, recently reduced the interest rate paid on overnight bank deposits. Markets are likely to remain in a trading range while awaiting news on the restart of trade negotiations.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
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