Market Update: Thursday, July 26, 2018

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Daily Insights

  • ECB holds steady. As expected, the European Central Bank (ECB) announced that it would continue its asset-buying program through the end of September and stated that it would keep interest rates unchanged “at least through the summer of 2019.”  Markets yawned at the news with the euro dropping slightly relative to the U.S. dollar, while the STOXX 600 remained unchanged. We expect that the ECB will end up extending its asset-purchase program past its September end date, albeit at a slower pace than the current 30 billion euro level. We also don’t expect any changes to interest rate policy until well into 2019, which the ECB confirmed would be the course of action.

  • Trump and Juncker strike a deal. U.S. stocks cheered the news late Wednesday that President Trump and European Commission President Jean-Claude Juncker agreed to hold off on imposing tariffs (including President Trump’s threatened 25% tariff on auto imports from Europe) and work toward a bilateral agreement. The two agreed to increase Europe’s imports of U.S. liquefied natural gas and soybeans and lower industrial tariffs. Trade headlines will remain front and center with NAFTA talks resuming today in Washington. China remains the primary focus for the White House, but this is clearly a step markets wanted to see, potentially setting the stage for more global cooperation.

  • U.S. economy remains the standout. The dip in Japan’s manufacturing purchasing managers’ index last month (to 51.6), coupled with stronger readings and slight increases month over month in the U.S., continue to point to the U.S. as the global growth leader. However, Europe’s reading (55.1), which is in line with the U.S. (55.5), did stabilize after a sizable drop earlier this year while broader data in Europe has improved in recent months relative to expectations. The U.S. will likely continue to distinguish itself tomorrow with the release of second quarter gross domestic product (GDP); Bloomberg consensus stands at 4.2%.

  • Trade gap increases for the first time since February. Data showed the U.S. merchandise trade deficit widened to $68.3 billion in June as exports dropped $2.2 billion following increases in each of the three prior months, while imports grew $1.3 billion. Exports are expected to be a large driver of growth in second-quarter GDP, a report scheduled for release tomorrow; however we expect the rise in exports was spurred by trade tensions and any related boost to GDP will prove transitory.

  • Wholesale Inventories, durable goods disappoint. Wholesale inventories were flat in June, lower than consensus estimates for 0.3% growth. Durable goods also came in below expectations last month at +1.0% vs. consensus estimates of +3.0%. On a positive note, shipments of capital goods (used to calculate GDP) jumped 1.0% (higher than estimates for a 0.4% increase).

  • Narrow market thesis to be tested today. Sharp losses in Facebook shares overnight following its quarterly results may be concerning for investors who think stock market leadership from megacap technology companies is too narrow. However, the data suggests market leadership is not unusually narrow at this time. A study by Ned Davis Research indicated that, based on more than four decades of data, the average weight of the top five stocks in the S&P 500, at 14%, is right in line with the long-term average of 14.3% (as of June 30, 2018).

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