Equities gave a little back this week, undoing about a third of last week’s rally, as investors continued to search for equilibrium following the abrupt sell off in early February. Since that drop, the S&P 500 has had three up weeks and two down weeks, reclaiming around 60% of its nearly 300-point plunge. The S&P 500 lost 1.2% this week, while the Nasdaq and Dow Jones declined 1.0% and 1.5%, respectively.
Trade war talk continued this week following reports that President Trump is seeking to hit China with steep tariffs and investment restrictions as early as next week. Those tariffs, which are expected to total as much as $60 billion, would initially be targeted towards information technology, telecommunications, and consumer electronic products as punishment for alleged intellectual property theft, but could eventually expand to a broader range of products.
The proposed tariffs were cited as the primary driver of this week’s sell off, as many believe they could lead to a trade war between the world’s two largest economies. Peter Navarro, Director of the White House National Trade Council, attempted to ease the tariff-induced fears in a CNBC interview on Thursday, assuring viewers that the U.S. can implement tariffs “in a way that is peaceful and will improve and strengthen the trading system.”
In other political developments, the White House made some notable personnel changes this week – CIA Director Mike Pompeo replaced Rex Tillerson as Secretary of State, and longtime CNBC personality Larry Kudlow replaced Gary Cohn, who resigned last week, as the president’s top economic advisor.
Nine of eleven S&P sectors finished the week in negative territory, with materials (-3.2%) being the weakest performer. Materials giant Monsanto (MON) dropped 4.8% on Thursday following news that its pending merger with Bayer will likely face additional hurdles from antitrust officials.
Meanwhile, the consumer staples (-2.1%), industrials (-2.0%), and financials (-2.4%) sectors also showed particular weakness. Financials suffered amid a flattening of the yield curve, which doesn’t bode well for lenders, as they rely on the difference between what they spend on deposits and what they charge for loans. The yield on the 2-yr note climbed three basis points to 2.29%, while the benchmark 10-yr yield dropped six basis points to 2.84%.
On a positive note, the rate-sensitive utilities (+2.6%) and real estate (+1.3%) sectors finished the week in the green.
Investors received several influential economic reports this week, including the February readings for the Consumer Price Index, the Producer Price Index, Retail Sales, Housing Starts, and Building Permits. In short, the data didn’t really give investors a reason to adjust their rate-hike expectations; it’s all but certain that the Fed will hike rates at its meeting next week, and the Fed funds futures market is still pointing towards a total of three rate hikes this year.
Source: Briefing Investor