US investors come back from Independence Day holiday in good spirits

American investors came back from the 4th of July Independence Day holiday in a better mood as the Dow gained 180 points and the S&P 500 rose almost 1%. US equities had their best day in five weeks. This is despite the tariffs coming onto the Chinese and the minutes of the Federal Reserve confirming more rate hikes will come. There was some positive economic news as the Institute for Supply Managements Survey climbed to 59.1 in June.  Equity markets in Europe look like they will follow the American lead and start the day on a positive note.

Some members of the Federal Reserve expressed the view that letting the US economy run too hot could store up problems further down the road. This view maybe in slight contrast to the one that has been held for some time. Members have tended to want to let the economy run slightly hot rather than risk a more aggressive tightening pattern that could impact growth. They would be happy to let inflation rise above the 2% target range for a time.

Brexit is never far from the headlines and this weekend’s meeting at Chequers will ensure that this will remain the case over the coming days. Theresa May continues to struggle with the pro Brexit arm of the Conservative party. Brexit has thrown up another acronym, BRINO, Brexit in name only. This is probably the one outcome that remainer’s and Brexiteers fear, the idea that we continue to be tied to European Union rules without the ability to influence them.

Equity markets look like they will finish the week on a more positive note, as sentiment seems prepared to look through, for now at least, tariff and interest rate fears. The Federal Reserve did note that trade war concerns have been rising amongst US businesses which has prompted some to freeze investment plans.

Most developed equity markets have remained in a tight trading range, on the one hand bolstered by reasonable economic growth whilst on the other held back by trade war fears amongst other things. Eventually one or the other will take the upper hand and change the direction of markets. So far developed equities have largely ignored the fall in Chinese equities and the yuan, something that it has not done in the past.

Posted on July 6, 2018 .