On a special podcast edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Consulting Director Sophie Antal Gilbert discussed trade war fears, the future of quantitative easing in the eurozone and the recent rise in copper prices.
Tariff talks heat up as G-7 summit gets underway
Recent progress was made in trade tensions between the U.S. and China, Eitelman said, with Commerce Secretary Wilbur Ross' June 7 announcement that the U.S. will end the crippling sanctions it had imposed on Chinese telecom giant ZTE (OTCPK:ZTCOY). "It appears that the demand to lift the sanctions against ZTE came directly from Chinese President Xi Jinping," Eitelman said, "and with the U.S. accommodating this request, it looks like there's been some headway made toward a potential new trade agreement between the two countries."
The other big issue in regard to global trade is the steel and aluminum tariffs the U.S. recently imposed on Canada, Mexico and the European Union, Eitelman said. The new tariffs will make the June 8-9 G-7 summit in Canada very interesting, he said, as many of the leaders of countries subject to these tariffs will be in the same room as U.S. President Donald Trump.
So, how could things play out? Eitelman's baseline view is that progress toward trade negotiations is the most likely outcome versus the start of a major trade war. That said, he noted that each week seems to bring new and significant developments on this front. "Ultimately, the potential for a trade war is something that we believe investors should keep in the back of their minds," he concluded.
Ending quantitative easing top-of-mind for ECB
Zooming in on Europe, Eitelman noted that eurozone bond yields rose the week of June 4 in response to recent remarks by Peter Praet, the chief economist for the European Central Bank (ECB). "Praet stated that at the bank's upcoming June 14 policy meeting, governing council members will assess whether or not to end the ECB's QE (quantitative easing) program by year's end," he said. Eitelman added that in his viewpoint, this assessment will largely be based on the degree of confidence the central bank has in its growth and inflation outlooks for the region.
"In my opinion, the fact that the ECB feels they need to make a decision on ending QE soon suggests that the bank is feeling pretty confident about where things are trending economically," he said.
Commodity rally continues as copper prices spike
Turning to commodities, Eitelman said that one of the primary catalysts that's led to a resurgence in the asset class during 2018 has been the energy market - with crude oil in particular performing well. The week of June 4, however, the strength in commodities broadened out quite a bit, he said. "Copper prices ended the week up roughly 6%, compared to the previous week, per the New York Mercantile Exchange," Eitelman noted. Why?
The spike is primarily due to worries over a possible labor strike at a copper mine in Chile, Eitelman said, noting that the country is the world's largest producer of copper. "The recent gain in industrial metals serves as a good reminder that commodities aren't only about energy," he said.
Key upcoming investor watch points: U.S.-North Korea summit and Fed meeting
Two important watch points for investors will take place the week of June 11, Eitelman said - starting with the scheduled summit between the U.S. and North Korea on June 12. "Any developments on this front that potentially ease tensions between the two countries will probably be well received by markets," he stated.
The second event that's likely to garner the attention of markets is the U.S. Federal Reserve's (the Fed) June 13 policy meeting, Eitelman said. While most investors have priced in an interest rate hike of 25 basis points, careful attention will likely be paid to whether or not the central bank evolves its guidance around the number of rate increases it plans to deliver going forward, he noted. In addition, the meeting represents an opportunity for the Fed to potentially change how it refers to its policy stance - which the central bank currently describes as accommodative. "Many analysts believe we're getting close to the point where Fed policy can no longer be termed accommodative - so any change in wording will likely command the market's attention," he concluded.
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