Investment Commentary – October 9, 2019

Year to Date Market Indices as of Market Close October 9, 2019
• Dow 26,301 (12.75%)
• S&P 2,913 (16.21%)
• NASDAQ 7,880 (18.81%)
• Gold $1,514 (17.87%)
• Oil $53.07 (15.89%)
• Barclay Bond Aggregate (9.21%)
• All World Index (11.58%)
• Fed Funds Rate 2.00 (-0.25 rate cut 9/18/19)
• US Real GDP Growth 2.0 Q2/2019 (Down from 3.1 in Q1)

Stocks jump as China-U.S. trade talks come into focus

Wall Street also awaits minutes from Fed’s most recent policy gathering

U.S. stocks headed higher Wednesday morning, as China and the U.S. attempted to ease simmering tensions, a day before high-level trade takes are scheduled to commence.

Investors also will watch for the minutes later this afternoon of the Federal Reserve’s September policy meeting last month to gather clues on the outlook for interest rates.

How are benchmarks performing?

The Dow Jones Industrial Average DJIA, +0.36% was 160 points, or 0.6%, higher at mid-morning, at 26,322.55. The S&P 500 index SPX, +0.53% gained 21 points to reach 2,914.68, up more than 0.7%, while the Nasdaq COMP, +0.71% added 68 points, or 0.9%, at 7,891.90.

On Tuesday, the Dow DJIA, +0.36% retreated 313.98 points, or 1.2%, to 26,164.04, while the S&P 500 index SPX, +0.53% gave up 45.73 points, or 1.6%, to 2,893.06. The Nasdaq Composite Index COMP, +0.71% retreated 132.52 points, or 1.7%, to finish at 7,865.

What’s driving the stock market?

Equity markets were boosted by reports that infused some optimism about the possibility of at least a partial U.S. – China trade deal.

A report from Bloomberg News indicated that China was open to a limited tariff resolution with the U.S., while another from the Financial Times (paywall) indicated that China has offered to increase by 50% purchases of agricultural products from U.S. farmers to $50 billion.

The reports come after the U.S. State Department on Tuesday announced visa restrictions on Chinese government and Communist Party officials who are believed to be involved in abuse of Uighurs and other Muslim minority groups in Xinjiang, China. That announcement came after the U.S. blacklisted some 28 entities for the same alleged violations, prompting Beijing to reportedly consider rolling out its own visa restrictions on U.S. nationals, according to Reuters.

A representative from China’s Ministry of Commerce said: “We strongly urge the U.S. to immediately stop making irresponsible remarks on the issue of Xinjiang” and demanded that the U.S. “stop interfering” in “China’s internal affairs, and remove relevant Chinese entities from the list of entities as soon as possible.”

Import duties on $250 billion worth of Chinese goods are set to be raised to a rate of 30% from 25% on Oct. 15.

Wednesday’s bounce comes from a hope that “this time is different” for the trade talks, said Kim Forrest, founder and chief investment officer at Bokeh Capital Management.

Talks have been “contentious,” Forrest said, “but both sides absolutely know something needs to be done.” Semiconductor stocks, and ETFs that track them, like the iShares PHLX fund SOXX, +1.28% and the ProShares Ultra Semiconductors fund USD, +2.47% were up sharply in morning trading, she pointed out, on investor optimism not just about a trade truce, but also better conditions for businesses.

Concerns about international trade issues have been weighing on the market, driving stocks lower on Tuesday even after Federal Reserve Chairman Jerome Powell said the central bank believes the current economic expansion can be sustained, and that the Fed intends to expand its balance sheet by purchasing short-term U.S. government debt in exchange for bank reserves, in an attempt to quell recent stress in the market for overnight bank-to-bank lending.

European stocks bounce back as investors watch U.S.-China trade talks

European stocks rose late-morning Wednesday, despite rising tensions between the U.S. and China on the eve of the start of high-level trade talks that are scheduled to start in Washington, D.C.

Recent reports have that Beijing was open to a “partial trade deal” and that it would aim to increase U.S. agricultural purchases, also helped to deliver a fillip to most European indexes.

The Stoxx 600 SXXP, +0.33% edged up 0.7%, while the German DAX DAX, +0.95% rose 1.3% and the France’s CAC PX1, +0.64% lifted 1%.

The FTSE 100 UKX, +0.21%, meanwhile, gained 0.6%, as the pound GBPUSD, +0.0573% recovered.

What’s moving the markets?

European stocks closed lower on Tuesday as hopes of a positive outcome from this week’s U.S.-China trade talks faded.

After blacklisting a group of Chinese tech companies over alleged human rights abuses against China’s Muslim minority groups, the U.S. followed up by imposing visa restrictions on a number of Chinese officials.

However, market participants may be taking the recent reports of China’s openness to a partial trade deal as a positive step in a week of rising tensions.

Chinese officials could also offer to increase annual purchases of U.S. agricultural products by $10 billion a year when negotiations resume tomorrow, the Financial Times (paywall) reported.

Stocks clawed back some of this week’s losses on Wednesday as cautious optimism returned.

Federal Reserve Chairman Jerome Powell kept the door open for further rate cuts on Tuesday, saying the central bank will act will act “as appropriate to support continued growth.”
Powell also said the Fed was contemplating buying shorter-term Treasury bills.

“This rise in geopolitical tensions has unsurprisingly seen markets in the U.S. and Asia come under pressure, though these nerves don’t appear to have translated into a weaker start for markets in Europe which have opened a little bit firmer,” wrote Michael Hewson, chief market analyst at CMC Markets, in a daily research note.

Around the web

New unemployment low: The 136,000 U.S. jobs added last month extended a recent run of modest, steady job growth, while the unemployment rate fell to 3.5%, the lowest in nearly 50 years. Wage growth was sluggish, with an annual rate of 2.9%—a pullback from previous months, but still higher than inflation.

Talks on tap: High-level trade discussions between China and the United States are scheduled to resume Thursday in Washington. Negotiators are still trying to get discussions back on track after talks broke down in May, triggering a recent round of tariff increases.

Uneven results: The S&P 500 and the Dow fell modestly for the third consecutive week while the NASDAQ rose slightly. The market’s late-week comeback couldn’t offset a two-day rout on Tuesday and Wednesday, when the S&P 500 dropped a combined 3.0%.

Oil slick: Crude oil prices have lost all the ground gained in a 15% rally in mid-September sparked by supply disruptions in Saudi Arabia. Concerns about a potential oil glut weighed on prices, leaving U.S. crude at around $53 per barrel, down from $62 on September 16.

Upcoming Events:
Release of minutes from September 17–18 meeting of the U.S. Federal Reserve Board
Job Openings and Labor Turnover Survey, U.S. Bureau of Labor Statistics

Consumer Price Index, U.S. Bureau of Labor Statistics

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.