Daily Market Color

Financial Markets Fluctuate on Earnings, Trump Rhetoric

 

Trump on Monetary Tightening and Tariffs

Those who thought President Trump’s criticism of the Fed would be limited to yesterday’s interview with CNBC were proven incorrect, as this morning he expanded upon his thoughts via Twitter-
 
“The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”     
 
In addition, Trump accused both the EU and China of manipulating their respective benchmark interest rates and currencies, leading to “not a level playing field.”  The European Union has been tightening its monetary policy at a tepid pace, citing concerns over trade wars and stagnant economic growth, while China continues to cheapen its currency – a move that many market pundits suggest is motivated by the need to offset the negative impact of tariffs.    

 

 

Speaking on the subject of tariffs, Trump doubled down on his threats to impose further import duties on China.  He acknowledged the administration’s willingness to instate tariffs on $500 billion worth of Chinese goods if the two nations are unable to successfully find a way to reduce the US trade deficit.  Foreshadowing an unpleasant outcome, just last week it was reported that trade talks between the two nations had reached an impasse.  US soybean prices have already been impacted by the tariff threats, falling to their lowest levels of the past decade, as China is expected to decrease its reliance on the US for the product and shift towards Brazilian soybeans.

 

 

Strong Earnings Balance Trump Tirade

A wave a strong earnings releases helped to offset the equity market concerns stemming from Trump’s interest rate commentary and trade war uncertainty.  All three major stock indices finished near unchanged on the day, largely assisted by shares of Microsoft which were up almost 2% during the session to a new record high.  Both US Treasurys and the dollar traded lower amid the geopolitical uncertainty.  Yields/swap rates climbed 1-7bps across the curve in a bear steepening pattern, as the 10-year note yield approached 2.90% for the first time in nearly a month.  The US dollar declined 0.8% against major currencies, retracing a portion of the 5% gain it has posted over the past three months.  In commodities, WTI crude oil futures settled 1.44% higher to $70.45/barrel, albeit declined on the week as the potential for increased global supply weighed on prices.  Gold futures climbed 0.55% to $1,230/ounce, rising from a one-year low.

 

 

The Week Ahead

Financial markets will pay close attention to any updates in the ongoing trade battles with China and the EU.  An opportunity for progress with the EU will present itself when Jean-Claude Juncker, the president of the European Commission, has an in-person meeting with President Trump next week.  Concerns amongst major auto executives have escalated recently alongside the potential for the US to impose tariffs on European car imports – a move which the EU has already threatened equal retaliation to.  By way of economic data, Q2 GDP figures on Friday will highlight key releases, where 4.2% QoQ growth is expected to be reported as robust consumer spending continues to boost the economy.

 

 

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