Daily Market Color May 18, 2018Treasuries Rally to Close Week as Geopolitical Tensions Simmer Jeff Davenport Trade Agreement Taking Shape Trade negotiations between United States and Chinese officials have reportedly started to make progress today, despite headlines this morning of a dispute over a previously agreed upon $200 billion reduction in the two nations’ annual trade gap. Commenting on the current negotiations, Director of the National Economic Council Larry Kudlow stated, “There’s no deal yet, to be sure, and it’s going to probably take a while. It’s a process. But they’re coming to play. I believe they want to make a deal.” The key points on the table include the reduction of bilateral tariffs and a pledge to cut the trade surplus. Previously announced tariffs by the US stand to impact as much as $150 billion in Chinese goods (of which there would be retaliation for), while China’s merchandise trade surplus currently stands at $375 billion. Equity Markets End Week Quietly US stocks finished mostly unchanged for a second consecutive session, as the heightened geopolitical uncertainty surrounding US relations with China, Iran and Japan continued to suppress investor risk appetite. With trading volumes relatively low, all three major indices closed within 0.5% of where they opened the day. On the week, the tech-heavy Nasdaq fell 0.7%, while the DJIA and S&P 500 slipped 0.5%. US Treasurys rallied into the weekend, with the yield on the 10-year note falling 5 bps to finish the session at 3.06% – 10bps higher than its level at the start of the week. The US Dollar continued its climb, gaining 0.2% vs. the Euro and 0.3% vs. the British Pound (probably not capturing any headlines in England this weekend). WTI crude oil futures fell 0.3% to $71.28/barrel while Brent crude shed 0.8% to $78.65/barrel. Despite today’s decline, oil posted its sixth consecutive positive week. Counting the Minutes Looking ahead to next week, much of the focus will be on the release of the FOMC’s minutes from its May meeting, where the Committee unanimously voted to hold rates at their current level. Of particular interest to financial markets will be the comments surrounding consumer price growth, where for the first time in years, Fed members acknowledged the presence of inflationary levels achieving its 2% target. Currently the Fed Fund futures market is pricing in a 92% probability of a quarter point rate hike by the FOMC at its next meeting in June.
