US Stocks ended last week with modest gains after the third quarter earnings season got off to a strong start. Among 13% of the companies that have reported on the S&P 500 Index, 83% of the companies have beat earnings by an average of 4% and 52% have beat on sales. The S&P 500 Index posted gains within 0.65% of its record high on Thursday 17 Oct.

China announced that its economy grew at an annualised rate of 6% in the third quarter of 2019- its slowest in 27 years and down from 6.4% and 6.2% in the first two quarters of the year. Oil markets were down during last week as global growth concerns mounted further pressure on the commodity while supplies remain ample.     

The EU and the UK are engaged in intensive negotiations following Prime Minister Boris Johnson’s proposed Brexit deal. The EU insists that any deal must avoid a hard border between Ireland and Northern Ireland, protect the economy of the island and the Good Friday Agreement and safeguard the integrity of the single market. The current deadline for Brexit is 31 October but if a deal is not reached and ratified by 19 October then the UK parliament has required PM Johnson to request another extension which could lead to a general election and/or another referendum. This uncertainty has been driving the volatility in Pound Sterling.

Encouraging news emerged last week as President Trump announced a ‘Phase 1’ trade deal between US and China in which the US would suspend planned tariff increases on October 15 in return for increased agricultural purchases from China, along with agreements on protection of intellectual property, access for financial services firms and currency pledges. This was moderately supportive of risk assets including equities and industrial metals. Gold, as a historically safe haven asset, remains in favour and is hovering around USD1500/oz as trade related risks are still far from resolved.

Comments by US Federal Reserve (Fed) Chairman Powell were notably dovish describing the current period as a mid-cycle slowdown but noting that the Fed is data dependent with “a healthy dose of risk management”. Powell confirmed that the Fed will soon resume allowing natural growth in its balance sheet by buying short term Treasury Bills to help avoid problems in the short-term money (repo) market as seen lately.  

Gold prices have moved very quickly in the past two months, gaining 14% in that short space of time. Gold’s gains have been consistent with the sudden drop in Treasury yields and rise in demand for safe haven assets. As we highlighted in The gold market reigns supreme, growing tensions between the US and China in the form of both a trade and a currency war have kept the market on edge, thus driving up the demand for safe haven assets. Both the market and the Trump administration appear to have forced the Federal Reserve’s (Fed) hands to ease policy. Market tantrums clearly have influenced Fed’s decision making, with the central bank changing policy course after equity markets faltered earlier this year. The Trump administration’s flip-flopping on the trade front, has also led the Fed to provide an “insurance” rate cut. Fed fund futures indicate that the market expects more rate cuts to come during the course of the year and that is likely to keep US Treasury yields low.

A risk we have highlighted in “40 Years of fraught US-Iran tension in the Persian Gulf plays on” is now being crystallised with the flow of oil moving through the Strait of Hormuz – the world’s most important transit choke-point – being hampered. Added to that, tropical storm Barry is shuttering production in the US Gulf Coast, temporarily tightening US supply of oil. Despite fears of oil demand slowing amid little progress with US-China trade talks, constrained supply is continuing to support oil prices.

Chinese stocks posted a loss last week as trade data underscored the impact of the tariff war. Export growth in June slowed 1.3% versus the prior year while imports fell more than expected by 7.3% over the prior year. The weak import data provided evidence of weaker domestic demand. June imports from the US dipped by 31.4% versus last year while US bound exports fell 7.8%. The latest trade data was a reflection of the latest tariff hike on US$200bn worth of Chinese good to 25% from 10% on May 10 due to the breakdown of trade talks in May.

The latest tweet by President Trump that China is “letting us down” by not increasing its purchases of American farm products as previously agreed by the two nations, provides further signs that little progress has been achieved since the G-20 meeting and the potential for further escalation remain high. Chinese producer prices over the year to June which were lower than expected and led to concerns about deflation. Meanwhile consumer prices rose by 2.7% over the prior year to June as a spike in food prices continues to drive consumer price growth trend higher. Milder reaction across Chinese equity and bond markets suggest investors continue to expect more stimulus by the Chinese government. Chinese GDP came in at 6.2% marking its lowest level since 1992. We believe this is in line with the government’s range bound target of 6- 6.5% outlined at the start of 2019 and were largely in line with estimates.

While the large cap indices represented by the S&P 500 Index and the Dow Jones Index attained record highs at 3,000 and 27,000 points respectively, the smaller cap Indices posted modest losses. Technology stocks represented by the Nasdaq Composite Index ended the week as the best year to data performer among US Indices posting 24% gains helped by gains among the chipmakers. The release of the Federal Reserve (Fed) chairman Jerome Powell’s testimony to the House Financial Services Committee was the main reason behind the strong performance US stocks. Powell was slated to tell the committee that “uncertainties surrounding trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook. Bad news become the good news as it provided investors with further signs that the tentative resumption of US-China trade talks and string June payrolls won’t be enough to derail the Fed from additional rate cuts.
,br/> Expectations of a rate cut at the Fed’s July 30-31 Meeting continued to dominate market sentiment. However, it looks like the recent positive economic data has dampened the odds of a 50Bps rate cut to only 21% according to the CME Group. Economic data last week surprised on the upside. The labour department reported that the core (excluding food and energy) inflation rose 0.3% in June versus consensus expectations for a 0.2% gain. Data showed that producer price inflation and consumer price inflation also increased more than expected. Inflation is within control and the market is pricing in another 2 to 3 rate cuts within the next 6 months. Weekly jobless claims fell to a 5-decade low. On the flip side, Small business sentiment snapped its winning streak of gains over the past 5 months. The positive data sent the yield on the benchmark 10-year Treasury note to its highest level in a month.

Surprisingly strong US labour market data released on Friday last week cast doubts on the Federal Reserve (Fed) being as dovish as the market had hoped. That took the cheer out of equity markets, while 10 year US Treasury yields - which had dipped below 1.95% on Thursday 4th July – rose back to over 2%. The US Dollar basket appreciated close to 0.5% intraday on Friday 5th July. That had taken the edge off gold, which declined from close to US$1420/oz in the middle of last week to just under US$1400/oz by the end of the week. With geopolitical risks remaining elevated, we suspect the downside risk to gold from the market’s re-assessment of the Fed’s policy course will be limited. Iran’s violation of the nuclear accord, constant threats of trade discussions derailing and further instability in Turkey’s institutions (following the dismissal of the country’s central bank governor) are keeping the demand for the historical safe-haven metal high.