Stocks suffered their worst week this year on worries that escalating trade tensions could further slow global economic growth. On Thursday the U.S. announced a 10% tariff on $300 billion worth of Chinese goods starting in September.
On Wednesday the Federal Reserve cut rates for the first time in a decade, citing uncertainty in the outlook, softness in business investment, and below-target inflation. Benchmark interest rates were lowered to 2.0% -2.25% range from 2.25% -2.5%. The Fed's assessment of the U.S. economy, however, did not change, with officials acknowledging strength in the labour market, a pickup in consumer spending, and a moderately growing economy.
Comments by Fed Chairman Powell at the post-meeting press conference caused an immediate negative reaction in markets when he played down the odds of multiple additional rate cuts to come, calling Wednesday's action a "midcycle adjustment," and not the first in a long series of rate cuts.
Fridays U.S. July jobs report confirmed that despite trade tensions and other global uncertainties, the labour market remains a source of strength for the U.S. economy. The number of jobs created in July decreased to 164,000 from the 193,000 in June. Yet this pace of job gains is well above the 110,000 that is needed to sustain the present growth rate for the economy.
The British government has earmarked an additional £2 billion to be spent preparing for a no-deal Brexit outcome. That brings total spending on Brexit preparations to £6.3 billion. Prime Minister Boris Johnson has repeatedly stated that while he prefers to negotiate a withdrawal agreement with the European Union, the United Kingdom will leave the EU on 31 October with or without a deal. Growing fears of a no-deal Brexit caused a plunge in the British pound, capping almost a 4% decline in July. On Thursday, the pound dropped to levels (below 1 pound per 1.21 U.S. dollar) not seen since early 2017, when the UK began the formal process of preparing to leave the European Union.
Earlier in the week the Bank of Japan voted 7-2 in favour of leaving short-term interest rates at -0.1% and long-term rates at around 0%. Board members voted unanimously to maintain other asset purchases.
Second quarter U.S. earnings continued over the week with 77% of the companies in the S&P 500 having reported results, with 76% of companies reporting a positive EPS surprise and 59% reporting a positive revenue surprise, according to FactSet Research.
Market Moves of the Week
The JSE All Share Index ended the week down -2.25%. Industrials benefited from a weaker rand, ending the week down -0.45% whilst the resource (-4.83%) and financial (-3.07%) sectors were both sharply down over the week.
The market declined as investors remained concerned about the financial situation at state-owned utility Eskom following a warning from Moody’s the previous week that the government’s plan to provide more financial assistance to Eskom would be “credit negative” for South African sovereign debt. Eskom recently reported a record annual loss of about 20.7 billion rand.
The market ended the week on a decisively negative note in response to President Trump’s tariff escalation against China, which prompted investors to shun emerging markets in favour of safe-haven assets.
Chart of the Week
On Thursday, President Trump announced via Twitter that his administration would be putting a 10 percent levy on the remainder of the US$300 billion worth of Chinese imports to the U.S. not affected by tariffs yet. Retaliatory measures from China are expected.
The information contained herein as well as the individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of Carrick or any financial product. This communication is intended to be used for information purposes only by its designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information freely available to the public and from sources believed to be credible and reliable, Carrick Wealth makes no representation that it is accurate or complete or that any returns indicated will be achieved. Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. The Carrick corporate group is also licensed in Zimbabwe and Malawi, and holds three global licences in Mauritius.