Art Hogan’s Week in Review – June 28, 2019
Week in Review
The month of June ushered in the start of summer, along with the best month for US equities since January. Using linear logic, we would assume that all the months that start with the letter “J” will be good for markets. Bring on July! We actually saw the best June performance for the S&P 500 since 1955, and the best June for the Dow Jones Industrials since 1938. What that tells us is little more than the fact that we had a bad month of May, and were able to retrace some of the damage done to the major indexes. When we zoom out a little, the “great” Month of May has the S&P 500 all the way back to where we were on April 23rd.
The two main drivers for the markets success in June, away from the low bar set in May, was the perception that Central Banks will be cutting, and a China Deal is coming. Both of those expectations have been gradually built into equity valuations, and at the same time come with timing risk. The Fed has indeed leaned more dovish this month, and the consensus still sits at a 100% chance of a rate cut at the July FOMC meeting. See data Here. There seems to be a gap between what the market is expecting and what we are hearing from the Fed. It is also important to remember that the more success that we have with trade policy, the less likely the Fed will be inclined to cut. In this particular Catch-22, we would prefer a trade deal and no rate cuts.
On the US-China trade front, starting today, Japanese Prime Minister Shinzo Abe welcomes world leaders to Osaka for the annual summit of the Group of Twenty (G20). This collection of major economies has been at the forefront of global governance since November 2008, when U.S. President George W. Bush convened an emergency committee to help rescue a world plummeting into the financial and economic abyss. While the summit will have an ambitious official agenda, equity markets will be focused almost entirely on the sideline meeting between Presidents Trump and XI.
The possible outcomes of the Trump and Xi meeting range from potentially very positive, where the framework of a trade deal is agreed upon, and new tariffs are postponed indefinitely, to very negative where no new negotiations are scheduled and President Trump imposes new tariffs on the remaining $300 billion in Chinese exports.
The midpoint between those two extreme outcomes is likely where we land. We will likely hear that the talks went well and there are officially scheduled times for the US and China trade teams to sit down and discuss the path towards a trade deal. President Trump will likely postpone the imposition of new tariffs, for a stated period of time, while both sides are negotiating in good faith. That is our and the consensus view, which has largely been priced into markets over the month of June. That still leaves plenty of work to do to actually get a trade deal done. Bring on July!
Highlights for the Week:
Fed Chair Powell made markets move this week at the Council on Foreign Relations in New York where he said the central bank will take a wait-and-see approach given how rapid recent economic changes have been and reminded that monetary policy should not overreact to any individual data point or short-term swings in sentiment.
One of the FOMC participants that has been vocal about cutting rates, St. Louis Fed President James Bullard, said on Wednesday, that he believed it was not necessary to cut the Fed funds rate by 50 basis points, preferring a 25 basis point “insurance” cut.
Boeing disclosed that it found yet another software bug that will impact the rollout of its beleaguered 737 MAX jet until at least October. Southwest Airlines, which has 34 of the 737 MAX jets in its fleet and dozens more on order, was among several airlines to say it is delaying the reintroduction of the airplane until at least then.
Apple Inc.’s chief designer Jony Ive is leaving after decades at the iPhone maker to form an independent company — with Apple as one of its primary clients.
AbbVie agreed to buy Botox-maker Allergan for $63 Billion in cash and stock. The announcement sent Allergan soaring 25.4%. AbbVie shares slid 16.3%.
Micron Technology Inc., the largest U.S. maker of computer memory chips, said it resumed some shipments to China’s Huawei Technologies Co., appearing to find a way around an export ban that threatens growth for the semiconductor industry.
West Texas Intermediate crude rose 8% to $57.90 a barrel in the month of June in the wake of new U.S. sanctions on Iran. With tensions between the US and Iran having intensified, Gold is up 7.7% for the month.
Next Week’s Catalysts
Monday – OPEC meeting (Jul 1-2), Japan’s manufacturing PMI for June (Sunday night/Monday morning), China’s Caixin manufacturing PMI for June (Sunday night/Monday morning), Eurozone manufacturing PMI for June (4 am ET), Eurozone money supply for May (4 am ET), Eurozone unemployment for May (5 am ET), US Markit manufacturing PMI for June (9:4 5am ET), US manufacturing ISM for June (10 am ET), US construction spending for May (10 am ET),
Tuesday – OPEC meeting (Jul 1-2), RBA rate decision (Tuesday morning), Eurozone PPI for May (5 am ET), Fed speakers (Williams), US vehicle sales for June, analyst meetings (Henkel), and earnings (AYI, GBX, and OMN before the open).
Wednesday – Japan services PMI for June (Tuesday night/Wednesday morning), China Caixin services PMI for June (Tuesday night/Wednesday morning), Eurozone services PMI for June (4 am ET), US ADP jobs report for June (8:15 am ET), the US trade balance for May (8:30 am ET), US Markit services PMI for June (9:4 5am ET), US non-manufacturing ISM for June (10 am ET), and US factory orders/durable
goods orders for May (10 am ET). US equities will close at 1pmET.
Thursday – US markets will be closed for the Jul 4 holiday. Trump will be speaking from the Lincoln Memorial on Jul 4.
Friday – the focus will be on German factory orders for May (2 am ET) and the
US jobs report for June (8:30 am ET).