- U.S. puts more pressure on China with threat of higher tariffs. President Trump asked U.S. Trade Representative Robert Lighthizer to look into increasing the proposed levies on $200 billion in Chinese imports from 10% to 25%. The news dragged global equities lower, particularly Asian markets, after reports had surfaced earlier in the week that the two sides were talking. The dollars are still small relative to the size of the respective economies, but risk of further escalation and lack of a clear path to resolution at this time are understandably unsettling for investors. Still, we maintain our cautiously optimistic outlook on emerging markets equities given prospects for eventual compromise, a strong earnings growth outlook, and attractive valuations.
- Fed leaves rates unchanged, upgrades economic commentary. The Federal Reserve (Fed) announced Wednesday that it would keep interest rates unchanged for now, a decision that markets largely expected. The Fed upgraded its view of the economy to growing at a “strong” rate from growing at a “solid” rate (in its June statement), which reflects recently improving economic data. Despite the change in language, market expectations for future rate hikes remained stable. Fed funds futures are pricing in a 94% chance of an interest-rate increase at the Fed’s September meeting, and a 72% chance of an additional rate hike by the end of the year.
- BOE hikes bank rate, ups forecasts. Bank of England (BOE) members unanimously voted to increase the central bank’s benchmark rate by 25 basis points (0.25%) to 0.75% and expect to continue tightening at a gradual pace, though the £435b quantitative easing program will remain in place. The central bank’s announcement came with upward revisions to its forecasts for economic growth and inflation, but ongoing Brexit negotiations remain an important variable for assessing the growth prospects in the UK economy.
- Global manufacturing activity slowing. Markit’s global purchasing managers’ index (PMI) slipped in July from 53.0 to a still expansionary 52.7. Eurozone activity held steady, including an uptick in Germany, and remained at healthy mid-50s levels. China’s reading slowed for the second straight month, which reflects some impact from ongoing trade disputes as the export orders component of the report dropped.
- Slight slowdown in U.S. manufacturing activity in July. The official ISM Manufacturing Index in the U.S. came in at 58.1 in July, below expectations of 59.4, adding to evidence that tariffs and risk of further escalation are beginning to impact U.S. manufacturers. However, this reading is still quite strong, near the 2018 average of 59, and an indication of continued strong earnings growth in the near term.
- U.S. and EM still look like better bargains than Europe. The S&P 500 Index is trading at a reasonable 16.5x consensus earnings estimates for the next four quarters, 2% above the post-1995 average. The MSCI Emerging Markets Index, at 11.5x, is trading 3% below its average for this period and remains attractive in our view. Europe, at 14x, is trading 12% above its 23-year average which, given that market’s relatively more defensive sector mix, is expensive.
- Are only a few stocks leading us higher? A popular narrative in today’s market is that a few larger stocks are pulling the S&P 500 higher. We don’t agree with this assessment, and in today’s LPL Research blog, we examine several measures of market breadth that suggest eventual new highs are likely.
- Factory Orders (Jun)
- Durable Goods Orders (Jun)
- BOE: Bank Rate
- BOJ: Minutes of Policy Meeting
- Trade Balance (Jun)
- Change in Nonfarm Payrolls (Jul)
- Unemployment Rate (Jul)
- Eurozone: Retail Sales (Jun)
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Index data obtained via FactSet
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