Weekly Update – Stocks Drop as Trade Tensions Ratchet Higher

US: S&P 500 Index -1.0%, Dow -1.2%, Nasdaq -2.4%
Europe: STOXX Europe 600 -1.3%, German DAX -2.1%, France CAC 40 -1.1%, U.K. FTSE 100 -1.1%
Asia: Japan Nikkei -1.7%, China Shanghai Composite -3.2%, Korea KOSPI  -2.0%
Rates/Commodities: 10-Year Treasury yield -5 basis points to 2.85%, WTI crude oil +8.3%, COMEX gold -1.4%

Global equities moved lower for a second straight week amid escalating trade tensions between the United States and China. Following last week’s announcement of an additional $200 billion in tariffs on Chinese goods, reports surfaced that the White House’s next step would be to restrict Chinese investment in certain technology companies and enhance export controls to prevent “industrially significant technology” from becoming available to China. Further adding to angst, motorcycle maker Harley-Davidson, the target of retaliatory tariffs from the European Union, announced that they would be shifting some production overseas. However, as LPL Chief Investment Strategist John Lynch noted in “Trade Tensions Playbook”, “We expect eventual compromise with China to preserve the upward economic and earnings growth trajectory in the U.S.” The results of round 2 of the Federal Reserve’s bank stress test helped markets recoup some losses later in the week however, as the majority of banks received approval to boost dividends and buybacks.

Overseas markets also remained under pressure, with the Shanghai Composite entering a bear market (defined as a 20% loss from market highs), and India’s rupee hitting an all-time low versus the U.S. dollar. The Japanese yen lost ground versus the dollar every day this week, despite reports that the Bank of Japan has dramatically tempered the pace of its asset purchase program. Finally, numerous factors including Iran sanctions, Venezuelan political turmoil, strong global demand, and a smaller than expected production increase by OPEC and Russia pushed oil prices up more than 8% for the week, a move that will surely be felt by consumers at the pump.

Next week figures to see low volume given the July 4 holiday midweek, but economic data will include global Markit Manufacturing Purchasing Managers’ Index data on Monday, durable goods orders on Tuesday and the unemployment report on Friday. You can view all the events on our Weekly Global Economic & Policy Calendar.

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