The S&P 500 rallied 4.4% as stocks finished higher for the best weekly gain in the last six months. However, bond yields declined to the lowest levels in nearly two years. Increased expectations of a Fed rate cut, positive response to the U.S. and Mexico reaching a resolution to avoid tariffs, and improved valuations, all helped stocks move higher.
In terms of economic data, signals were mixed with strength from the services sector mostly offset by weakness in the manufacturing sector. While job gains for the month of May came in below expectations, the unemployment rate is still very healthy at a 50-year low. Analysts expect a more balanced mix of positive and negative moves this season and feel confident about rising corporate profits, strong economic growth, combined with low interest rates creating a positive fundamental base that outweighs risks.
This also offers an opportunity to enhance diversification. Reviewers call for appropriate global stock-market allocations, with diversification across asset classes, including small- and mid-cap stocks, that will likely benefit from increased trade fears or renewed economic signals.
There remains continued evidence of a slowdown in the U.S. economy, which in turn boosted hopes for a turn in Fed’s policy. Numbers from ADP showed that private sector payrolls had grown by the smallest monthly amount in over nine years for the month of May. Alongside that news, the Labor Department reported overall, payrolls had expanded by only 75,000 in May. The saving grace: May’s unemployment rate held steady at of 3.6%, its lowest in five decades. Almost immediately after the figures were issued, futures markets began pricing in over a 98% probability of a rate cut in 2019, which they say has a 90% chance taking place by July (source: CME Group data).
Economist suggest that ultimately, the determination of whether the economy continues to grow or falls into recession will be determined by the labor market and household spending. By most estimates, these are expected to remain healthy enough to support moderate GDP growth this year. This is heavily weighted in favor of the still-healthy labor market that is driving several key metrics.
Mexico On Hold
Expected tariffs planned to come into effect on June 10th were averted in a last-minute deal reached between the U.S. and Mexico. In a joint declaration released by the U.S. state department, the two countries said Mexico would take “unprecedented steps” to curb irregular migration and human trafficking.
The U.S. did not however, get one of its key demands that would have required Mexico to take in asylum seekers heading for the U.S. and process their claims on its own soil.
Mexico agreed to:
- Deploy up to 6,000 additional troops along Mexico’s southern border with Guatemala using its National Guard beginning Monday
- Take “decisive action” to tackle human smuggling networks
The US agreed to:
- Expand its program of sending asylum seekers back to Mexico while they await reviews of their claims.
- “work to accelerate” the adjudication process
Both countries have offered pledges to “strengthen bilateral co-operation” over border security, including what they have called “coordinated actions” and information sharing.
These actions, while not inferring a long-term solution, have arrested the immediate actions of the intended tariff going into place and offered some signs of confidence that the two parties can work out terms that will give the markets breathing room.
Metals and Mining
The precious metals markets were given a lift this week by geopolitical issues that continue to plague investors who then seek out the metals as safe havens. At the forefront was the gold market, which saw its best weekly performance in more than a year. Some leading analysts have predicted that the precious metal has enough momentum now to snap the critical long-term resistance barrier in the near-term. Lower U.S. employment growth helped push gold prices back to within close breaking distance of the all critical $1,350 level. During the week, August gold futures traded at $1,347.10 an ounce, up 2.7% compared to the previous Friday.
Gold faces some strong technical headwinds. Since hitting its 2015 low, it has tested resistance at or near $1,350 a total of eight times. Silver is taking some signals here, following gold’s lead on Friday. It added gains on the back of ongoing geopolitical concerns too, trading just under the US$15 per ounce level on track for its best week since late January. The others in the precious group were also up: platinum was up close to 1 percent for the week and on track for its first weekly gain in the last seven weeks. Palladium also climbed, edging up 1.05 percent for the week. As of 10:05 a.m. EDT Friday, palladium was trading at US$1,346 — a gain of close to US$20 from the previous week.
Energy and Oil
Once again, energy shares lagged, weighed down by continued weakness in oil prices, and the typically defensive utilities and real estate sectors also underperformed. Oil futures climbed for a second straight session Friday, with U.S. prices erasing their loss for the week just two days after dipping into a bear market. Natural gas spot prices fell at most locations this week. Henry Hub spot prices fell from $2.63 per million British thermal units (MMBtu) last Wednesday to $2.39/MMBtu. Temperatures were close to normal across much of the Lower 48 states, with warmer-than-normal temperatures in the Pacific Northwest and cooler-than-normal temperatures in the Southwest and Northeast. At the Chicago Citygate, prices decreased 22¢ from a high of $2.43/MMBtu last Wednesday to $2.21/MMBtu yesterday. Traders will be watching updates on a production-cut agreement between the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers ahead of the deal’s expiration at the end of this month.
European stocks rose as investors began pricing in expectations for rate cuts as both the U.S. Federal Reserve and the European Central Bank (ECB) indicated that they could possibly intervene if trade tensions hit the global economy. The pan-European STOXX Europe 600 Index and the UK’s FTSE 100 Index gained more than 2%. The exporter-heavy German DAX Index and Italy’s FTSE MIB Index both gained almost 3%. Germany, which leads European economies, reported that its Bundesbank data showed weak exports are taking a toll on the German economy and cut its economic output forecast to 0.6%, down from 1.6% in December. The central bank also slightly lowered forecasts for 2020 and 2021. Meanwhile, signs of China’s slowing economic growth continued to accumulate. Clearly this is raising hopes for stimulus from Beijing. The International Monetary Fund trimmed its 2019 growth forecast for China to 6.2% from a prior 6.3% estimate and projected 6.0% growth next year.
The Week Ahead
This coming week is a relatively light week for reporting, but some areas to focus on include inflation numbers to be released on Wednesday, along with May retail sales and consumer sentiment reported this coming Friday.
Key Topics to Watch
– Mexican Tariffs relaxation
– China Trade War changes based on Mexico
– U.S. Retail Sales Report for May
– U.S. inflation figures reported by the Fed
– Gold to test the $1350 per ounce mark
Markets Index Wrap Up