The major equity indexes closed out the trading day on Monday in positive territory although they were off their highs for the day. Leading the parade of positive gains were technology stocks on optimism for progress in U.S.-China trade talks and signs of a likely reprieve for Chinese telecom company Huawei.
Despite losing some of its initial steam, the S&P 500 still managed to close at a record high after the United States and China agreed on Saturday to resume trade talks. Trump also offered concessions including no new tariffs and an easing of restrictions on Huawei Technologies, while China agreed to make unspecified new purchases of our farm products.
Still, stocks had given up a good portion of their earlier gains as investors contemplated whether the Fed would be as dovish as has been anticipated recently and caution crept back in for what is likely to be a lightly traded week due to the July Fourth holiday.
The index of tech stocks, Wall Street’s top performers so far in 2019, rose 1.45%, with heavyweight Apple chalking up a 1.83% gain, thereby providing the largest impetus to the index.
Chipmakers with a sizable revenue exposure to China rose nearly 5% at their session high before also pulling back, ending with a 2.65% gain in the Philadelphia Semiconductor index. Huawei supplier Micron Technology gained 3.9%.
Rising expectations over the possibility that the Fed will cut interest rates to preserve a strong run of economic growth, and a dovish turn by central banks around the globe, helped the S&P 500 index and the Dow Jones Industrial Average post their best June performance in decades.
Despite the latest development in talks, traders still anticipate the Fed’s next move will be a rate cut of at least a quarter of a percentage point at its July 30-31 policy meeting.
Data showed growth in manufacturing fell in June while factory activity shrank across much of Europe and Asia, further supporting expectations of a rate cut.
Gains on the Dow were held in check by a 2.1% drop in Boeing after a report that federal prosecutors had subpoenaed records relating to the production of the 787 Dreamliner in South Carolina.
Wynn Resorts rose 5.9%, the most on the S&P, as gambling revenue in the Chinese territory of Macau rose more than expected in June. Shares of peers Melco Resorts & Entertainment and Las Vegas Sands were also higher on the day.
Coty fell 13.5%, the worst performer on the S&P 500 index, after the company said it would overhaul its operations and write down about $3 billion in value of its brands acquired from Procter & Gamble.
Approximately 7.04 billion shares changed hands on the major domestic equity exchanges on Monday, as compared to the 7.15 billion share daily average over the past 20 trading sessions.
Factory Activity Falls
Manufacturing activity fell to a 2-1/2-year low in June, with a measure of new orders received by factories dropping sharply amid growing anxiety over the escalation in trade tensions between the United States and China.
It is the latest indication that economic growth slowed in the second quarter after getting a temporary boost from exports and an accumulation of inventory.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.7 last month, the lowest reading since October 2016, from 52.1 in May. A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy.
The ISM said businesses “expressed concern about U.S.-China trade turbulence.” The United States’ bitter trade war with China has hurt business sentiment. That, together with disruptions to supply chains caused by import tariffs, is weighing on manufacturing.
Trump and Chinese President Xi Jinping on Saturday agreed to a trade truce and a return to talks. However, Trump said he was “in no hurry” to cut a deal and Chinese state media warned there was no guarantee an agreement would be reached.
Manufacturing is also taking a hit from an inventory overhang, which has resulted in businesses placing fewer orders with manufacturers.
A reduction in the production of Boeing’s MAX 737 aircraft, which was grounded in March following two fatal plane crashes in five months, is weighing on activity.
The weakness in factory activity is in sync with a slowdown in economic growth following a temporary boost from exports and an accumulation of inventory.
Consumer spending is rising moderately, while the pace of job and wage growth has slowed. In addition, the housing market is struggling, and the goods trade deficit widened in May.
The ISM’s new orders sub-index decreased 2.7 points to a reading of 50.0 last month, the lowest reading since December 2015. But factories reported hiring more workers, with a gauge of manufacturing employment rising to 54.5 from 53.7 in May.
Construction Spending Down
Commerce Department indicated on Monday morning that construction spending fell 0.8%, making it the largest decline since last November. Data for April was revised to show construction outlays rising 0.4% instead of being unchanged as previously reported. Construction spending fell 2.3% on a year-on-year basis in May.
Construction spending surged in the first quarter, aided by increased investment in roads and highways by state and local governments.
Spending on private construction projects fell 0.7% in May to the lowest level since January 2017. That followed a 1.0% decline in the prior month. Private construction outlays were also down in March.
Investment in private residential projects fell 0.6% in May to its weakest level since December 2016, after a 0.6% decrease in April. Private residential construction outlays have now declined for five straight months.
Homebuilding has remained weak even as mortgage rates have dropped sharply from last year’s high levels. Spending on residential construction has contracted for five straight quarters.
Spending on private nonresidential structures, which includes manufacturing and power plants, decreased 0.9% in May after plunging 1.4% in the prior month.
In May, investment in public construction projects fell 0.9% after surging 4.5% in April. Spending on state and local government construction projects slipped 0.6% after jumping 4.3% in April. Outlays on federal government construction projects tumbled 5.2% in May after rising by 7.3% in the prior month.
OPEC Extends Oil Reduction
OPEC agreed on Monday to extend oil supply cuts until March 2020, as the group’s members overcame their differences in order to prop up the price of crude amid a weakening global economy and rising U.S. production.
The move will likely not sit well at the White House, which has requested in no uncertain terms that OPEC leader Saudi Arabia supply more oil and help reduce prices at the pump if Riyadh wants U.S. military support in its standoff with arch-rival Iran.
Benchmark Brent crude is up more than 25% so far this year after the White House tightened sanctions on OPEC members Venezuela and Iran, slashing their oil exports.
OPEC and its allies, led by Russia, have been reducing oil output since 2017 to prevent prices from sliding amid soaring production from the United States, which has overtaken Russia and Saudi Arabia as the world’s top producer.
Fears about weaker global demand as a result of a U.S.-China trade spat have added to the challenges faced by OPEC.
The United States, the world’s largest oil consumer, is not a member of OPEC, nor is it participating in the supply pact. A jump in oil prices might lead to costlier gasoline, a key issue for Trump as he seeks re-election next year.
Brent rose as much as $2 on Monday toward $67 per barrel as traders cited OPEC’s resolve to curb output.
The OPEC meeting on Monday will be followed by talks with Russia and other allies, a grouping known as OPEC+, on Tuesday.
Russian President Vladimir Putin said on Saturday he had agreed with Saudi Arabia to extend existing output cuts of 1.2 million barrels per day, or 1.2% of global demand, until December 2019 or March 2020.
Iran’s exports fell to 0.3 million barrels per day in June from as much as 2.5 million bpd in April 2018 due to Washington’s fresh sanctions.
The sanctions are putting Iran under unprecedented pressure. Even in 2012, when the European Union joined U.S. sanctions on Tehran, the country’s exports stood at around 1 million bpd. Oil represents the lion’s share of Iran’s budget revenues.