The first half of the year wraps this week with trade storm clouds on the horizon

Last week’s OPEC meeting provided for some interesting trading in energy markets, particularly on Friday. The production deal signed off on by OPEC on Friday allows for a nominal boost in production, to the tune of 1 million barrels per day. However, given the simple nature of the lift in output relative to global production and the lack of specifics in the announcement, many industry observers were left a bit confused. Even cartel and non-cartel members seemed to have their own take on the announcement in a follow-up press conference on Saturday. After gaining fractional ground in the early stage of the week, on Friday, WTI crude spiked 5.71% higher, and in the process, posted its best one-day performance in nearly six months.

Adding a degree of confusion to the trade was the realization that many members of the cartel are not in a position to raise production irrespective of the announced increase in production. The production announcement was a win for Saudi and Russian interests as they are the two producers most capable of increasing production.

There are a significant number of variables at play concerning crude pricing moving forward from Friday’s announcement. Venezuela’s energy sector has collapsed in recent years – effectively having the effect of tightening a production-restrained global supply. Additionally, concern over the impact of potential American tariffs aimed at the EU and China are adding a degree of complexity to the equation.

On Saturday, the OPEC ministers, specifically from Saudi Arabia, made it clear that they would do whatever it takes to keep crude markets in balance – in a nod to both President Trump, and also to the fragile state of our on-going global growth. Given the rising rate of inflation and other measures of economic performance that speak to current near-optimal performance, any cost-push inflation as a result of sharply higher energy prices would have a negative impact on the global economy. Disrupting the current rate of global growth could inflict harm on the cartel and its control over pricing.

Though WTI crude posted its best day in 6 months on Friday, the near term direction for crude prices remains unclear

This week’s EIA Petroleum Status Report for the week ending 6/22 is due on Wednesday. Last week’s report reflected a draw on crude inventories of 5.9 M barrels while gasoline (+3.3M/bbl) and distillates (+2.7M/bbl) saw inventories rise. It was mixed. However, the dramatic draw on inventories played into the OPEC narrative on Friday – effectively lighting the fuse for the Friday melt up which allowed for WTI crude prices to rally sharply.

This Week’s economic highlights

It probably goes without mention that though this week’s economic calendar is active, Thursday’s release of Q1 GDP reading will deservedly garner the lion’s share of investor attention. The last Real GDP reading Q/Q change SAAR was 2.2%. The GDP price index – Q/Q change SAAR was 1.9%, and Real Consumer Spending was 1.0%. Econoday consensus is calling for a final reading of 2.2%. Given that GDP represents the total value of our production and purchases in the quarter, and given that it is the broadest metric for our economic health, it will likely have an impact on investor outlook both this week and well into Q3 if there is a significant deviation from the previous reading.

The balance of this week’s economic calendar has plenty in it to keep investors’ attention. Manufacturing will be a focus. We receive the Dallas Fed Mfg. Survey on Monday, the Richmond Fed Mfg. Index on Tuesday, and the Kansas City Fed Mfg. Index on Thursday. As we have discussed for some time now, the manufacturing sector has been a bright spot for the US recovery in recent quarters – much to the surprise of many. With talk of trade wars heating up, the manufacturing sector is looked at as being vulnerable. Any weakness in this week’s manufacturing data will likely add additional weight to the headwinds investors have been experiencing in equity markets.

New Home Sales figures for May are due out Monday. Econoday consensus is calling for a gain of 665K. The Conference Board’s Consumer Confidence survey for June is due out on Tuesday. Econoday consensus is 128.1 – virtually unchanged from May’s 128. Both figures are at or near multi-year highs. Also hovering at multi-year highs, the University of Michigan’s Consumer Sentiment Survey for June is due out on Friday. Econoday consensus is calling for 99.2 versus May’s 99.3.

Closing out the first half of 2018

We head into the last week of Q2 on a decidedly cautious note. The year-to-date performances posted by the majors speak directly to that in spite of solid earnings and revenue growth across nearly all equity market sectors in the first half of the year. The Dow Industrials, for example, have lost 244 points, or .9% YTD. The Dow’s 52-week performance is a blistering +17.84%, but all of that gain came in 2017. The current P/E is 18.54.

Dow Jones Industrial Average (^DJI)
24,580.89 +119.19 (+0.49%)
At close June 22 4:37pm EDT

Courtesy: Yahoo Finance

The S&P 500 has faired modestly better in the first half having gained 59 points or 2.1%. The S&P 500’s 52-week performance is also solidly positive at +15.20%. Again nearly all of that performance came in 2017. The S&P 500’s current P/E is a more elevated 21.03.

S&P 500 (^GSPC)
2,754.88 +5.12 (+0.19%)
At close June 22 4:37pm EDT

Courtesy: Yahoo Finance

Not unexpectedly, the Nasdaq Composite has by far posted the best YTD performance of the major indices. It has posted a YTD gain of 11.42%. Over the past 52-weeks, the Nasdaq Composite has gained 24.13% and sports a P/E of 23.745.

NASDAQ Composite (^IXIC)
7,692.82 -20.14 (-0.26%)
At close June 22 5:15pm EDT

With the first half of the year wrapping up this week, investors will be focusing on several themes in the second half of the year. Among them: inflation, energy prices, trade wars/tariffs, earnings, and the impact of the tax code on the economy and consumer spending moving forward.

Flickr Photo: Bob Jagendorf

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