This is the third straight week that U.S. stocks finished higher. Both the S&P 500 and the Dow closed at new record highs. The clear driver for the for the rally in both bonds and stocks was the Federal Reserve releasing news that it is open to rate cuts this year – possibly as early as next month. The committee dropped its statement about being patient in setting rates, which had signaled it would hold rates steady for some time. Instead, it now states it will act as appropriate to sustain the economic expansion. Following the financial crisis of 2008, the U.S. stock market first achieved a new record high in 2013. It has now set 225 all-time highs, validating the fact that new highs can’t be viewed as a single indicator of exhaustion. It’s important to note that periodic dips in the market provide a good opportunity for long-term investors to expand diversity in their portfolios by adding high-quality assets at lower prices.
In the first quarter, the U.S. economy grew at a solid 3.1%, but showed some signs of weakness. Consumer spending dropped to half its average rate and when combined with a lackluster jobs report and slowing wage gains set the stage for potential slowdown. This week though, the Fed demonstrated to the markets its willingness to cut rates in order to head off rising risks from deflation, trade threats and a slowing global economy. Markets reacted swiftly as the U.S. 10-year Treasury yields dropped to 2.0%, but rebounded to 2.06%. U.S. rates are low but still higher than most developed countries. So, it is likely that foreign demand for U.S. Treasuries will help keep long-term rates low and analysts expect it to prolong the bull market by providing inexpensive credit to businesses and consumers.
Metals and Mining
It looks like the patience of gold bulls has finally paid off. This week, demand for the precious metal managed to drive prices to levels we have not touched on in nearly six years. Gold climbed 2 percent on Friday morning (June 21), rising above US$1,400 per ounce to reach as high as US$1,410.78 at one point. The driver for the surge is obviously the Fed delivering its dovish opinion that the market was seeking. Essentially this has removed the ‘patience’ approach to cutting rates,” that the Fed has echoed all year. Some analysts feel gold’s major breakout could be just the start of a long-awaited rally as investors strongly expect a shifting interest rate based on a cut that could come as early as next month. Gold saw most of its gains this week following the Federal Reserve’s monetary policy meeting.
Silver followed gold’s lead once again proceeding the Fed announcement, but in the end gave up 1.2 percent of its gains. In the other precious metals group, platinum was down nearly 2 percent for the week. On Friday morning, the metal was trading at US$799 per ounce. Like the others, palladium rallied up 1.43 percent for the week, but edged down just over 1 percent on Friday. As of 9:43 a.m. EDT, palladium was trading at US$1,487 per ounce, still higher than gold.
Energy and Oil
Oil prices spiked up about 5 percent on Thursday as the U.S. announced out was considering a military strike against Iran. The U.S. military seemed poised to carry out a strike late Thursday, but the operation was called off by President Trump at the last minute. Reuters reported that Trump may have relayed a message to Iran that he was seeking to open negotiations. Friday morning Trump tweeted that he called off the strike because it would not be proportional to the shooting down of an unmanned drone. His tweet reads “I am in no hurry, our Military is rebuilt, new, and ready to go, by far the best in the world. Sanctions are biting & more added last night. Iran can NEVER have Nuclear Weapons, not against the USA, and not against the WORLD!,”.
Still, this had the whole region on alert. Iranian sources told media that the Supreme Leader was opposed to negotiations. They also said that any attack would have regional and international consequences. As the week closed oil prices were set for their largest weekly gain since February. Natural gas spot price movements were mixed this report week. Henry Hub spot prices remained flat at $2.36 per million British thermal units. At the New York Mercantile Exchange, the price of the July 2019 contract decreased 11¢, from $2.386/MMBtu last Wednesday to $2.276/MMBtu Friday. The price of the 12-month strip averaging July 2019 through June 2020 futures contracts declined 9¢/MMBtu to $2.442/MMBtu.
Equity markets rose this week on expectations of added stimulus. European stocks rose, mostly fueled by anticipation of more central bank stimulus measures. The pan-European STOXX Europe 600 Index, UK’s FTSE 100 Index, the exporter-heavy German DAX index, and Italy’s FTSE MIB Index all gained. This followed an announcement by ECB President Mario Draghi that the bank could offer more stimulus measures as early as July. Draghi’s comments came prior the Federal Reserve’s commitment that it is ready to cut rates if the U.S. economic outlook does not improve.
The euro fell about 1% against the U.S. dollar on the week while the yield on 10-year German government bonds fell to a new all-time low of -0.315%, and the yield on the French 10-year bond hit 0%, its lowest level ever. The British pound rose almost 1% against the U.S. dollar, in part led by the Bank of England’s (BoE) decision to hold short-term rates steady at 0.75%.
With positive momentum across all markets, the Chinese stocks advanced for the week. Traders are betting that a meeting between U.S. President Trump and his Chinese counterpart Xi Jinping at this week’s G20 meeting in Japan would put the two countries back at the trade table, which halted last month. The benchmark Shanghai Composite Index gained 4.2% and the large-cap CSI 300 Index, added 4.9%. Both indexes recorded their largest weekly gains since the week ended April 5, according to Reuters.
Sentiment toward Chinese stocks also picked up after the Fed left its key rate unchanged and signaled that it was ready to lower short-term interest rates for the first time since 2008.
The Week Ahead
Important economic news to come out this week ranges from consumer confidence to global influence. The Conference Board’s consumer confidence report comes out on Tuesday followed by the important durable goods orders numbers on Wednesday. To cap off the week, the University of Michigan issues its sentiment report on Friday. The very important G20 Leader’s Summit kicks off in Japan beginning Friday. President Trump and Chinese leader Xi have said they will to meet separately in a session aimed at resolving important issues hanging up trade negotiations between the two global powers. The outcome will certainly send messages to global markets.
Key Topics to Watch
– US – Iran military tensions
– G20 Leader’s Summit
– Conference Board Consumer Confidence Report
– U of M sentiment report
– Durable goods orders report
– Gold entering new territory
Markets Index Wrap Up