Economic data releases remained light during the week as market sentiment was driven mainly by rhetoric tied to trade wars. The United States may be looking to impose tariffs on an additional $200 billion of Chinese goods, adding on to the initial tariffs the Trump administration has laid forth. The effect to Chinese equities was pronounced to the downside during the week as the Shanghai Composite Index remains lower by -20% since mid-January. Chinese officials have vowed to retaliate but their response will have to be creative, in our opinion, when we consider the fact that total exports to China equated to $155 billion in 2017 relative to the $505 billion imported to the U.S. from China (Bloomberg). Whatever the case may be, and without taking political sides, our internal objective analysis indicates that additional tariffs may cause undue market volatility in the near-term and they have the potential to alter corporate earnings to the downside. One such example became evident during the week when Daimler AG, the parent company of Mercedes Benz, adjusted forward earnings revisions lower due to potential tariffs by the United States on European Union (EU) goods. Such an announcement has a direct effect to equity market prices on a forward looking basis and its potential for a further trickle down effect remains plausible. The German equity market (DAX Index) closed the week lower by -3.30% as criticism on a potential trade war remained heightened.
The downside in global equity markets during the week was not entirely driven by tariffs and trade war discussions, despite that those are the dominant talking points. The new government coalition in Italy, which is believed to maintain a subtle anti-EU mentality, sparked further fears of a potential desire to exit from the EU with the appointment of two euro-skeptics to key posts in various finance committees. The populist nature of these individuals may further fuel the desire, or pressure, to act on further negotiations to better Italy’s debt structure. Despite such a potential, there was also good news stemming from the EU during the week. The Greek government was able to successfully obtain a maturity extension on their debt and was able to cease eight years of requested bailouts. The ASE Athens Index gained over 1% on the news and proved to be one of the few global indices to finish in positive territory for the week.
On the domestic front, the Standard & Poor’s (S&P) 500 closed the week lower by -0.87% while small capitalization equities (S&P 600) gained 0.31%. Such a gain makes rational sense when considering the fact that small cap companies derive revenues from domestic consumers, ergo foregoing the threat of tariffs. Economic data releases did little to sway sentiment despite the relatively positive news. Housing starts in the month of May witnessed a notable upside while existing home sales were announced near expectations. The notion of a tightening domestic monetary policy, which can cause upside pressure to interest rates and mortgage rates, has failed to notably push buyers away. The fact remains that mortgage rates remain near record low territory (relative to the previous 20 years) and home ownership is an attainable component for many individuals. When we consider the health of the labor market amidst the strong housing markets, as well as the improvements in wage growth and income gains, the ability of the housing market to remain strong appears to be plausible.
Investment Policy Committee:
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.