Market Review July 2018

Geopolitical issues around the globe, especially those surrounding U.S. President Donald Trump, continue to leave investors concerned about the future. Still, the US economy posted record growth and lower oil prices could keep consumers happy at the pump.

United States Q2 GDP impresses

The growth rate of the US economy was stellar over the second quarter of 2018. US GDP growth hit 4% on the quarter as reported by the Bureau of Economic Analysis (BEA), which almost doubled the growth rate of 2.2% seen in the first quarter.

Some are attributing the growth to President Donald Trump’s recent tax cuts. Nancy Curtin of Close Brothers Asset Management noted, “The tax cuts are now filtering through to the real economy as companies have been empowered to increase investment spend, the lion share of which is going into technology and automation.”

Other’s aren’t so certain this growth can be sustainable. “Overall, helped by the massive fiscal stimulus, the economy enjoyed a strong first half of this year but, as the stimulus fades and monetary policy becomes progressively tighter, we expect GDP growth to slow markedly from mid-2019 onwards,” said Paul Ashworth of Capital Economics.

Gold continues its bear streak

The summer has brought a bear market for gold prices, which have kept in line with their drop since April, and are settling around the $1,200 level. Much of this decline is attributed to the advance of the US dollar in an economy which is growing faster than expected. As the Federal Reserve raises rates to keep up with this growing economy, gold falters even more, not being able to compete as an investment against higher yield-bearing assets.

“It has certainly been another painfully bearish trading month for gold, thanks mostly to a broadly stronger dollar and heightened US rate hike expectations…Ithas clearly struggled to register any meaningful recovery in recent weeks, despite global trade tensions creating uncertainty and stimulating risk aversion,” wrote Lukman Otunuga, research analyst at FXTM.

However, there is one sign of an imminent bull run for gold prices as seen in a recent high of short positions on gold-futures, paving the way for massive short-covering buying in the coming months. If gold-shorts begin to cover their positions there could be a potential for a gold bull-run going into the Fall.

Oil prices slide, but companies still benefiting

One thing is certain, when OPEC reports high output, oil prices are certain to fall. This is exactly what happened toward the end of the month, as an OPEC survey reported the organization hitting a yearly high in July, reigniting concerns of oversupply in the market. Adding to supply concerns, Russian energy minister Alexander Novak noted his country is expected to hit a 30-year production high of 11.02 million barrels per day in 2018. This could lead to lower gas prices for consumers heading into the late Summer and early Fall where consumer travel is still a large economic factor.

Tensions between the United States and Iran are still high and overshadowing the market. “The oil market will be watching how this develops, given the amount of uncertainty around Iranian oil supply moving forward, as a result of U.S. sanctions,” ING said in a note.

Still, overall higher oil prices than recent years are benefiting oil companies as a whole. London-based BP PLC reported a significant increase in second-quarter profits, with a replacement cost profit of $1.8 billion in the quarter, compared to $600 million over the same period one year prior. “I can’t remember when it has looked this good,” BP Chief Executive Bob Dudley said. BP, along with other industry giants such as Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell PLC, saw higher profits over the quarter.

Amazon revenue soars

Led by its cloud-computing services, profits and revenues for the US tech giant grew substantially over the second quarter. Amazon Web Service (AWS) cloud-computing revenue grew almost 48.9% to $6.11 billion in revenue, beating analysts’ expectations. This part of the company’s business represented 11.5% of its revenue over the quarter, up from 10.8% of the company’s revenue a year ago.

Amazon is continuing to benefit from its purchase of Whole Foods Market last year, with a reported $4.3 billion in physical store sales, up 16% from what the natural foods chain reported as a stand-alone company for the same period one year earlier.

Analysts’ remain confident about the company’s business model and prospects for the future. “We remain confident that AWS revenue can double to $42 billion by 2020 based on current cloud momentum and new products,” KeyBanc analysts led by Edward Yruma wrote in a Monday note.

Overall, the company reported revenue up 39% to $52.9 billion, a number which actually was lower than expected by almost 1%. Still, Amazon generated an operating income at its highest level ever, beating expectations.

China keeping in-line with tax cuts

As their trade skirmish with the United States continues, China has stepped up its efforts to support its economy through tax cuts and issuance of 1.35 trillion yuan ($200 billion) of special bonds for local government infrastructure plans. Unlike the US economy which grew at a significantly greater rate in the second quarter, the Chinese economy slowed to an annual rate of 6.7%.

“The government will issue targeted and well-timed regulations in the face of external uncertainties and ensure the economy performs within a reasonable range,” according to a statement released after the State Council’s executive meeting on 23 July.

Still, the country is aiming to hit its target growth rate amidst the barrage of trade sanctions from the US, with the International Monetary Fund (IMF) expecting 6.6% growth from the world’s largest country, only slightly lower than last year’s 6.9% rate. Chinese President Xi Jinping noted that his country’s economy has resilience and room to maneuver. Xi is allowing the country’s currency, the yuan, to continue its devaluation in an attempt to give some slack to the stagnant economy.

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