Weekly Update –Trade Tensions Spook Markets, Fed Hikes Rates

Weekly Performance

US: S&P 500 Index -5.95%, Dow -5.67%, Nasdaq -6.54%
Europe: STOXX Europe 600 -3.15%, German DAX -4.06%, France CAC 40 -3.55%, U.K. FTSE 100 -1.75%
Asia: Japan Nikkei -4.88%, China Shanghai Composite -3.58%, Korea KOSPI -3.10%
Rates/Commodities: 10-Year Treasury yield -3.2 basis points to 2.81%, WTI crude oil +5.73%, COMEX gold +2.5%

Concerns that protectionist policies could escalate into a trade war ratcheted up this week with new developments that included President Trump formally announcing additional tariffs aimed directly at China, which followed up shortly thereafter with retaliatory tariffs of its own. The news led to the S&P 500 Index posting its largest one-day decline in March since 2009, pushing the index into negative territory on the week and year; however, while we believe protectionist policy is perhaps the biggest risk facing stocks right now, the total value of the tariffs in relation to the size of the economies involved is trivial and would therefore be expected to have a negligible impact on economic growth—assuming tensions do not escalate meaningfully. As for the recent weakness in the equity markets, according to John Lynch, LPL Research Chief Investment Strategist, “economic growth in the U.S. and abroad remains solid, S&P 500 earnings growth is expected to top 15% this year, and the data we monitor suggest little chance of recession on the horizon; so we view any near-term market pullbacks as potential opportunities for suitable investors to add to equity positions.”

Investors’ also closely monitored the Federal Reserve’s (Fed) monetary policy meeting on Tuesday and Wednesday, though the market reaction to the 0.25% increase in the fed funds rate was relatively muted with the rate hike having already been priced in. Some of the key changes in the central bank’s policy outlook, which we reviewed in Wednesday’s blog, included upward revisions to its economic growth forecast, employment levels, and inflation expectations, though the median forecast for additional rate hikes in 2018 remained at two.

Next week’s calendar has plenty for markets to chew on, including a host of Fed speakers. Early week data includes U.S. manufacturing surveys from the Dallas and Richmond Federal Reserve Banks and consumer confidence. Later in the week, we get housing data that includes MBA mortgage applications and pending home sales, as well as the final read on fourth quarter gross domestic product (GDP). Ahead of the Good Friday holiday, the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, is due out for February along with the Chicago Purchasing Managers Index and the University of Michigan’s Consumer Sentiment Survey. Key releases overseas include consumer and producer inflation figures throughout the week from France, Germany, Italy, and Japan; as well as Eurozone consumer confidence and fourth quarter GDP from the U.K., France, and South Korea.

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