It’s not sexy, but it’s the literal foundation of the economy and the best proxy of growth that speaks to the future. I’m talking about industrial metals such as steel and aluminum. The scuttlebutt moving these metals includes the United States taking trade action on steel, which is based on national security and China potentially curbing aluminum capacity.

Key stocks, including U.S. Steel (X) and Century Aluminum (CENX), closed above pivotal resistance points, hinting that a big leg higher is upon the market.

While cheap supplies and dumping are an issue, there is a demand side of the equation that’s a proxy for the global economy. On that note, the world’s economies are chugging along nicely, much faster than the United States that they are enjoying equity rallies to boot.  The probability is that these rallies are tenuous and susceptible to shocks, including a trade war.

Economic Growth

The Global Gross Domestic Product (GDP) growth is steady, although the aging populations of the European Union (EU), United Kingdom (UK), and Japan are poised for slower growth next year. This leaves emerging economies to pick up the slack and to provide growth.

Global GDP Growth	2016	2017	2018
World	3.0%	3.5%	3.6%
United States	1.6%	2.1%	2.4%
European Union	1.7%	1.8%	1.8%
United Kingdom	1.8%	1.6%	1.0%
Japan	1.0%	1.4%	1.0%
China	6.7%	6.6%	6.4%
India	7.1%	7.3%	7.7%
OECD

Equities Soaring

At the moment, the global stock market is hinting at sustained growth even in nations with well-known political challenges:

• Turkey +33%
• India +19%
• South Korea +18%
• Philippines +16%
• Mexico +11%

Nations that have turned on giant money-printing presses to create trillions of dollars, euros, the yen, and pounds see more modest stock market gains:

• US (S&P 500) +9.3%
• EU +6.8%
• Japan +5.6%
• UK +3.8%

Yesterday, Senator Benjamin Sasse used the opportunity during the questioning of Fed Chair Janet Yellen to take a not-so-veiled shot at President Trump on trade wars and harsh rhetoric positions on the sharp decline in U.S. corn exports to Mexico. There is no doubt Mexico has become a major agricultural export market, growing to $17.9 billion from 2006 to 2016, with corn, soybeans, and pork leading the way.

I’m no fan of trade wars, but there is no doubt action must be taken on cheap steel, and the North American Free Trade Agreement (NAFTA) needs to be refreshed. By the same token, America needs to craft new trade deals as the rest of the world is turning to its neighbors in the absence of U.S. deals. In order to achieve our goals, the President will have to walk softly and carry a big stick.

However, there are risks - folks in the administration know what those are, and will take care not to rock the boat too much.

Earnings Season Begins

So, it begins. The second-quarter earnings officially kicked off yesterday with financial results from big banks.  By now, everyone understands guidance matters more than the actual number, but the earnings momentum points to sustainable upside potential, and the ability of management to execute.

On another note, those sectors with low expectations were positioned not only to beat but also to see their shares pop, whereas those sectors and individual names that posted amazing numbers could elicit yawns from investors.

Second Quarter Earnings Gains Consensus	Year to Year Change
Energy	+360%
Technology	+10.3%
Financials	+5.5%
Materials	+4.6%
Real Estate	+3.9%
Consumer Staples	+3.2%
Industrials	+2.5%
Telecommunications	+1.2%
Health Care	+0.5%
Utilities	-1.5%
Consumer Discretionary	-2.3%

 

Today’s Session

The market is digesting a lot of things this morning including bank earnings and economic data that has been deemed "disappointments."

I think the knee-jerk aspect is counterproductive.  Retail sales came in less than expected, but some of it is explained by the Consumer Price Index which also came in under consensus.  Consider that, grocery retail fell 0.5% and restaurants dropped 0.6%. Does anyone think we eat much less in June than May?

Its a reflection of price deflation that the Fed says is transitory. One thing for sure, the Fed will not be hiking rates in September which isn’t good news for banks (we will update bank overview in coming days as additional names report).

Comments

It seems to me, Mr. Ross has done a great job in the short time he has been their adjusting our trade positions around the world. I think its just a matter of giving him more time on some of these bigger deals. In other words give the new admin a chance. Dave on 7/14/2017 10:51:47 AM

Wilbur Ross is my hero...built fortune finding value in blue collar industries left for dead. I have a ton of faith in him and I even like pushing back hard on unfair trade but there might be a couple of voices looking for a trade war that would have massive collateral damage. CP Charles Payne on 7/14/2017 10:56:14 AM

"Does anyone think we eat much less in June than May?" Charles, 0.5% delta in eating is almost insignificant. June is the beginning of the heat here in the Florida panhandle. When it is hot, we eat less. Also, with this past June being the wettest in history for much of the SE, there were fewer burgers on the grill. William Slighter on 7/14/2017 12:26:24 PM

Flat tax 15%, encourage quarterly profit sharing to increase productivity, and require payments to suppliers within max of 45 days (manufacturers<100 employees). Large companies take 90 days or more. These few actions will eliminate the need for most trade sanctions because we will be world competitive. Burche Melson on 7/15/2017 6:07:47 PM

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