US stocks power ahead as global trade war lacks impact

The US sharemarket is like a runaway train as investors endorse the strength of its economy while other markets are feeling pressured by the global trade war.

While the tit-for-tat tariff increases between the US and China have freaked some, others are discounting its effect as China runs out of options.

Meanwhile, President Donald Trump is on the verge of a summit in Helsinki with his Russian counterpart, Vladimir Putin.

At the weekend, Mr Trump ended his visit to the UK, including to one of his golf courses in Scotland, after calling out the EU for its long-standing trade war against the rest of the world.

Asked by a CBS interviewer whom he considered to be the biggest threat to the US, Mr Trump said, “The European Union is a foe, what they do to us in trade.” He added that “Russia is a foe in certain respects,” as is China when it comes to economics.

(Of course, the biggest victim of the EU’s trade war against agricultural producers worldwide is New Zealand, which has a massive trade deficit.)

US data coming up
In the week ahead, US economic data will include retail sales, industrial production and housing starts. The last are in a downward trend but the other two are expected to be positive.

On Wall Street, stocks continued their strong run. The Dow Jones Industrial Average rose 94.52 points, or 0.4%, to 25,019.41 on Friday, gaining 2.3% for the week.

The S&P 500 added 0.1%, to 2801.31, closing at its highest level since February 1 and advancing 1.5% for the week.

The Nasdaq Composite reached a fresh closing high of 7825.98, rising 1.8% over the week. The S&P 500 is now up 4.8% for the year.

“If somebody’s going to get hurt if we engage in some kind of trade war, it’s far more likely to be China than the US,” B Riley FBR chief global strategist Mark Grant says.

Confirming this, the Shanghai Composite has dropped 14% this year, while markets in other export-heavy countries have also fallen.

South Korea’s Kospi Composite Index is down 6.3% for the year, Germany’s DAX has lost 2.9% and Japan’s Nikkei Stock Average has declined 0.7%.

Bank earnings rise
US corporate earnings results continued to impress, with JPMorgan Chase and Citigroup posting double-digit profit increases on Friday for the latest quarter.

JPMorgan chief executive James Dimon said the economy was charging ahead on most fronts.

“If you’re looking for potholes out there, there are not a lot of things,” he said, adding that global trade tensions were “affecting psyches more than economics.”

A third bank, Wells Fargo, stumbled, with a number of one-time charges. It also reported a shrinking loan book and lower fees in several of its main businesses.

Nonetheless, investors are shying from financial stocks as rising interest rates are expected to hit earnings longer term. JP Morgan’s stock fell slightly on Friday while shares of Citigroup and Wells Fargo each fell more than 1%.

Federal Reserve chairman Jerome Powell is scheduled to testify on Capitol Hill over two days, beginning on Tuesday in the Senate.

Investors will be looking for clues about how he might change the Fed’s rate plans if the US faces a more protracted trade fight or if long-term bond yields fall below short-term yields, the so-called inverted yield curve that has typically preceded a recession.

Bond yields converge
The 10-year Treasury note yield has stalled, ending at 2.831% on Friday and little changed on the week. The yield on the two-year note, by contrast, climbed to 2.590%.

The S&P 500 utilities sector – considered bond-like because of its relatively big dividend payouts – has risen 8.1% over the past four weeks, soaring past the broader index’s 0.9% advance in the same time period.

Shares of smaller, more domestically focused US firms have also outperformed, with the Russell 2000 more than doubling the S&P 500’s gain for the year.

“The domestic US economy is kind of the shining star of the world right now,” Richard Bernstein Advisors chief investment officer Richard Bernstein says. “If you think there’s going to be a global slowdown, the US should be outperforming – there’s nothing surprising about that.”

Goldman Sachs estimates exports to China make up just 1% of US GDP, meaning it's unlikely trade tariffs will have a material impact on multinationals’ corporate earnings growth.

Bank of America Merrill Lynch raised its 2018 and 2019 earnings-growth estimates for the S&P 500, citing better-than-expected earnings in the first half of the year.

For one example, Netflix is expected to report another quarter of robust subscriber gains when it posts second-quarter results later today. Most of the company’s growth has come from additions in international customers as its home market matures.

In commodities, oil prices have stabilised since tumbling midweek after Libya indicated it would resume export activities at its eastern ports, potentially easing fears of a supply shortage.

US crude for August delivery settled at $US70.58 a barrel while Brent crude, the global benchmark, ended at $US74.92.