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Market’s growing concern over trade outweighing fundamental strength

JUN. 25, 2018

• Most indexes were lower last week, with the S&P 500 falling for the first time in five weeks, though it fell less than 1%. Small caps continue to lead the way, with the Russell 2000 closing at another record high, and is up 10% so far this year.

• Trade talk continues to dominate the news. There continue to be reports that the U.S. is working with China to avoid implementation of a severe round of tariffs on July 6, though each encouraging report is matched with a nerve-racking one. Over the weekend, the WSJ reports that the Trump Administration plans to curb Chinese investment in the U.S., in reaction to the theft of intellectual property.

• Meanwhile, despite trade tensions, global economic growth is healthy. PMI data came out last week, with the U.S. well into expansion territory. Also, our leading economic index was released and was very encouraging. The Atlanta Fed’s GDPNow model now shows 4.7% growth for the second quarter, which is more than double the 2.2% in the first quarter. Eurozone PMIs came in better than expected and showed acceleration from recent months.


OPEC and partners did agree to a boost of 1m barrels per day, though the actual hike will be more like 600k, since many participants are unable to increase supply. There are now signs of cracks in the foundation of the deal, with some arguing that others (mostly Saudi Arabia) should be able to pick up the slack for others, such as Iran, that can’t boost supply. Oil prices jumped last week and a bit this morning, as the hike was below what was hoped for.


Rhetoric has accelerated, though it is in everyone’s best interest to come to a peaceful conclusion. While Trump’s approach is unusual, his argument is rational. Europe has $150 billion trade surplus with the U.S. in autos, yet they tax our cars 10% while we tax theirs at 2.5%.


Once again, Argentina is classified as emerging market (rather than frontier), as some of the capital controls by the previous president are being withdrawn. As much negative noise that trade populism has caused, the positive moves by Argentina are a sign that the global economy continues to reduce barriers. Overall, the emerging markets are far more mature than previous cycles, with clearer rule of law and more stable governments. This should allow structural outperformance through time, though periods of weakness (such as the current one) will continue.


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