Last week, global stock markets experienced some turbulence and major indexes marked a nearly universal step lower. Investors were cautious, as the Federal Reserve provided more hawkish guidance for interest rates in 2019 than expected and the U.S. President Donald Trump wrote on Twitter that he is willing to implement a 10% import tax on goods from China, which are currently tax-free and makes 300 billion USD in annual sales, indicates that trade talks are not going as smoothly as investors would like to hear.
The Federal Reserve members decided to lower the key interest rate by 0.25%, however, that was not enough to spur a rally in equity markets and it even caused a correction, as expectations were extremely high, partially pricing 0.5% rate cut. Investors were also willing to hear about more cuts later in 2019, however, the Fed chair Jerome Powell said that this cut was more as an adjustment to a business cycle, not a start of large scale easing.
Also, the Fed announced about the end of balance sheet normalization, which already started on August 1, 2019. This means, that the central bank will keep its balance sheet stable and reinvest proceeds back into the market, what will provide better U.S. dollar liquidity and stronger demand for the U.S. treasury bonds. In general, the normalization process started in October 2017, and in 22 months balance sheet decreased by -15.2% with an annual rate of -8.6%.
The major U.S. stock indexes stepped down from the all-time highs. The week's best performance showed the Dow 30 losing -2.6%, while other major indexes marked bigger corrections - Nasdaq Composite lost -3.9% and S&P500 -3.1%. It is worth mentioning that the current business cycle lasts for 122 months, and is the longest in recorded history. The second-longest cycle was between 1991 and 2000, and took 120 months. Considering this perspective, J. Powell comments about interest rate adjustment in mid-cycle are very optimistic, especially considering a fact, that average business cycle is only 60 months.
China's major stock index, Shanghai Composite, lost -2.6% and finished the trading week on a lower boundary of the last 3-month trading channel. Manufacturing sector purchasing managers' indexes were stable, however, remained below 50 points level, which indicates that businesses remain under pressure, especially due to the trade war.
In the U.S. bond market, a difference between 2 and 10-year bonds dropped from 0.21% to 0.15% and the difference between 3 months and 10-year slipped to even more negative zone from -0.01% to -0.20%. The major proxy, yield of 10-year bonds, decreased to 1.86% and reached the lowest level since November 2016.
In commodities market momentum was negative. Oil price of WTI type decreased -1.7% to 55.2 U.S. dollars per barrel. Price movements in the metals segment were negative as well: aluminium lost -4.5%, copper depreciated -0.7% and iron ore stepped lower to 105 U.S. dollar for ton.
Summarizing performance of business segments, the best result showed utilities, which increased in value by 0.5%. The weakest performance showed technology and commodities companies, which lost -4.4% and -4.6%.
Last week quarterly financial performance announced one of the largest U.S. industrial conglomerate General Electric. It has several major business segments and provides products to aviation, energy, renewables and healthcare companies. For a very long period of time, General Electric was considered the leading player in U.S. corporate field with strong profitability metrics, low leverage and innovative solutions. However, since 2008 the company has experienced troubles, especially in the energy business, which generated a loss in recent years. Due to weak financial performance, management cut dividend payments and focused on deleveraging of balance sheet. Worth to mention, that since its last price peak in 2007, General Electric lost -75% its equity value, while S&P500 increased 93%, what shows the size of troubles in the company in recent years.
In the second quarter, General Electric received 28.8 billion U.S. dollar in revenue and beat 28.8 billion market expectations. Adjusted earnings per share were 0.17 U.S. dollar and were higher than 0.12 market estimations. Company's CEO Larry Culp said that these are the first positive signs of successful turnaround process and operational stability. However, the aviation segment, a major source of value and earnings, indicated that orders were -10% lower, primarily due to Boeing 737 Max problems and lower production quantities of this plane model.
After the earnings announcement, General Electric shares lost around -4% and over the last 12-month period share price diminished around -20%.
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