China trade retaliation extends sell-off. The S&P 500 Index declined 3%, its worst day of 2019, after China retaliated against new tariffs on Chinese goods announced by the Trump administration last week. While the escalation in trade tensions is worrisome and increases the risk of a policy mistake that can’t be easily unwound, we believe that both sides are still testing each other with hardball negotiating tactics and that there are still meaningful opportunities for progress. In the meantime, we expect markets to see continued bouts of volatility against a backdrop of still supportive but softening economic fundamentals.
10-year yield reaches another low. Renewed trade tensions and the global stock sell-off weighed heavily on Treasury yields. The 10-year Treasury yield declined for a seventh straight day to 1.71%, its lowest close since October 2016. Global buying pressure has driven fixed income markets lately, but we’re still optimistic about U.S. yields long term based on solid economic fundamentals.
Markets stabilize overnight. Futures markets sold off sharply after the market closed Monday following an announcement that the Treasury Department has formally designated China a currency manipulator. Markets then steadied overnight after China stepped back in to stabilize its currency. The designation comes with no immediate consequences, but it is symbolically meaningful. Headline risk is high right now as markets continue to react strongly to signals on trade and central bank policy, and the overnight moves show how sentiment can shift back and forth during volatile periods. We still believe the market may become more sensitive to upside catalysts if we see more heavy selling pressure, and we would look to evaluate any large potential move for opportunities.
Services sector weakens but still shows solid expansion. The Institute for Supply Management’s (ISM) non-manufacturing Purchasing Managers’ Index (PMI) came in at the low end of economists’ forecast range at 53.7 in July, but remains solidly in expansionary territory (above 50 indicates expansions). Nevertheless, the decline signaled that slowing global growth and trade concerns are starting to impact the service sector as well.
Another summer storm. U.S. stocks have hit another summer storm, but pullbacks could provide opportunities for suitable investors to rebalance, diversify portfolios, or to add to equity positions. We’ll share more of our thoughts on recent volatility in today’s LPL Research blog post.
NEW Market Signals podcast. Listen to this week’s episode, in which Senior Market Strategist Ryan Detrick and Chief Investment Strategist John Lynch discuss the ongoing U.S.-China trade war and its effects on the U.S. and global economies. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts!
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