Weekly Market Drivers | LPL Financial Research

Stocks Retrace Prior Week Gains

US: S&P 500 Index -4.60%, Dow -2.31%, Nasdaq -4.93%
Europe: STOXX Europe 600 -3.37%, German DAX -4.17%
France CAC 40 -3.81%, U.K. FTSE 100 -3.96%
Asia: Japan Nikkei -3.01%, China Shanghai Composite +0.68%, Korea KOSPI  -1.01%
Rates/Commodities: 10-Year Treasury yield -14 basis points to 2.86%, WTI crude oil +1.50%, COMEX gold: +2.18

Mounting anxiety over a potential slowdown in global growth tied to trade, an inversion in the yield curve, and wild swings in the price of oil dragged the S&P 500 Index down more than 4% this week, erasing most of last week’s rally.

Initial market reactions were positive to reports out of last weekend’s G-20 Summit that indicated the U.S. and China reached a trade agreement that would suspend planned tariff increases on Chinese goods coming into the U.S., which were set to take effect in January. Investors’ skepticism mounted about the two sides’ ability to come to final terms within the 90-day agreed-upon window amid a lack of details and inconsistencies between the countries’ statements about the agreement.

Stocks began selling off to the benefit of bonds; however, the yields on both 2-year and 3-year Treasuries rose above the 5-year for the first time since July 2007. The event, referred to as an inversion of the yield curve, made headlines given its used as a recession gauge. On the yield curve, LPL Chief Investment Strategist John Lynch said, “It’s important to note that neither of these measures of yield curve steepness have been reliable precursors to recessions. We think this move may be better interpreted as a market signal to the Federal Reserve that it needs to temper the pace of its rate hikes in 2019. As a recession indicator, the most reliable yield curve spreads have been those with larger maturity gaps, such as 2-10 year, which have not inverted.”

Also contributing to the spike in volatility were oil prices, which were on a roller coaster ahead of an OPEC meeting in Vienna on Thursday, but an agreement to reduce output by roughly 1.2 million barrels per day led WTI crude to finish the week up more than 5%.

Major foreign indexes had no reason to buck the U.S. trend, particularly after a string of global manufacturing and services sector data indicated that activity overseas continues to lag. Emerging markets stocks held up relatively well despite anxiety over the U.S.-China agreement, suggesting investors may remain optimistic that a deal will come into view before too long.

Looking to the week ahead, investors will be looking for a sign of reprieve after the latest bout of volatility. After recent dovish comments from the Federal Reserve (Fed), next week’s inflation readings on consumer and producer prices should provide additional clarity for the future path of rate hikes. The overseas docket is relatively light, though a European Central Bank meeting on Thursday is noteworthy. Track these and other important events on our Weekly Global Economic & Policy Calendar.

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