U.S. stocks reached new record highs, spurred by increased corporate earnings results and strong second-quarter GDP numbers. It appears U.S. economic growth slowed in the second quarter thanks to trade and business investment pressures, but consumer spending which has the greatest influence, beat estimates once again, coming in at 4.3%. The solid GDP report comes at an opportune time as the Fed is expected to cut rates next week. That’s in response to increasing risks from slowing global growth. The service sector of the economy, including big providers like Alphabet (Google), is holding steady, and alongside healthy consumer conditions, leads analysts to support the view that economic expansion will continue over 2019.
The U.S. stock market has gained 21.8% so far this year and the moves in Fed policy regarding interest rate cuts have helped. Stocks are driven by several factors beyond central bank actions. The momentum of the economy and corporate earnings serves as a guide for overall performance. Earnings announcements this week added perspective to the way ahead for the markets. They supported the fact that the economy is poised to grow but underscored potential threats. Strong trends in the financial and industrial sectors offer a good sign for the outlook. Analysts agree that sustained economic growth over the next two years would create a solid base for earnings growth, even if modest. That would extend the current bull market period.
Metals and Mining
The metals and mining markets are as focused on the Fed announcement as any. It appears that the week can play out one of two ways — the Federal Reserve introduces a 25-basis point rate cut and gold consolidates, or the central bank doubles down on easing with a 50-basis point cut and potentially gold rallies to new highs, analysts suggest. Gold has traded between $1,430 and $1,411 this week but ended the session down 0.55% on the week. August Comex gold futures ended at $1,418.50. That was up 0.27%. Wednesday’s announcement will be a key factor. Markets are currently pricing in a 78.6% chance of a 25-basis point cut and a 21.4% chance of a 50-basis point cut (source: CME Group’s FedWatch Tool). Markets feel the Fed will begin its easing cycle, but it is more important to see if the central bank is headed on a major easing cycle.
Silver has moved 9.7% higher despite a mere 1.3% gold rally. That equates to a significant 7.4x upside leverage. This is being well received by silver enthusiasts. This outperformance is considered even more impressive because it was driven primarily by big capital inflows into SLV by American stock investors returning to silver.
Energy and Oil
Oil prices ended the essentially flat, based on demand fears and inventory draws offsetting each other. Again, geopolitical factors failed to change the market in either direction. However, fundamentals are certainly playing larger role in oil markets, since the geopolitical issues seem to be impacting pricing less and less. Large oil field services companies are indicating that the industry is going to feel more pain before things get better based on slowing drilling. They see further softening during the fourth fiscal quarter. That follows statements by big providers about similar concerns for contraction in the U.S. shale sector. Temperatures were higher than normal across the Northeast and Great Lakes regions after a heatwave at the beginning of the week. But by week’s end, most of the severe heat began to dissipate, adding downward pressure on prices. Temperatures across the eastern and central United States were generally lower than normal by the end of the week. Henry Hub spot prices fell 16¢ from $2.38/MMBtu last Wednesday to a low of $2.22/MMBtu a week later. At the Chicago Citygate, prices decreased 25¢ from $2.26/MMBtu last Wednesday to a low of $2.01/MMBtu at the same time last week.
Markets in Europe rose over all, lifted mostly by positive earnings reports and again supported by indications from the European Central Bank (ECB) that more monetary stimulus will take place. The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, German DAX, and Italy’s FTSE MIB Index all headed higher on the week. The euro fell against the dollar. That came after the ECB kept rates steady but indicated it is willing to cut short-term rates for the first time since 2016. The signal is a significant major policy shift aimed at protecting the European economy. ECB President Mario Draghi didn’t help much, stating that the economy is getting “worse and worse,”.
Chinese stocks advanced as traders in anticipation of high-level trade talks with the U.S. next week. The benchmark Shanghai Composite Index added 0.7% and the large-cap CSI 300 Index, gained 1.3% for the week. U.S. and Chinese negotiators are schedule to hold trade talks in Shanghai on July 30 and 31, the first such talks since negotiations broke down in May.
The Week Ahead
All eyes will be on the actions of Fed this week in what promises to be a very active week of reporting. Earnings will also be a big part. One-third of the S&P 500 companies are scheduled to report second-quarter earnings. The Federal reserve is fully expected to cut rates for the first time since the Financial Crisis of 2008. Other key economic data emerging next week includes consumer spending, the ISM Manufacturing Index, July’s jobs report, and the trade deficit figures.
Key Topics to Watch
– S&P companies reporting
– Consumer spending numbers
– Consumer confidence index
– ADP employment
– Fed rate announcement released Wednesday
– Construction spending for June
– ISM manufacturing index
– July Motor vehicle sales
– Unemployment rate released Friday
– Trade deficit for June
Markets Index Wrap Up