Khanna: How Politics Affected The Market This Week

A breakdown by Ikroop Khanna on how politics affected business in the last week.


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U.S. and North Korea sign accord

Donald Trump met with North Korean leader Kim Jong-un last week and signed a key document charting agreements between those participating at the historic summit in Singapore. The seemingly hostile and tension-ridden relations between the leaders of the United States and the DPRK quickly melted away.

The document outlines how the leaders hope to further efforts in complete denuclearization, and join their efforts to build a lasting and stable peace regime on the Korean Peninsula. The world markets were little affected by this news as investors seemed to ignore the summit, whereas the U.S. dollar rose slightly against an index of major currencies.

Trump and China Tariff dispute

Trump has kept his long-standing vow of bringing business back from China, while also punishing China for what he considers unfair Chinese trading practices.

The Trump Administration announced last week Friday that it would likely impose a 25% tariff on an estimated amount of $50 billion in Chinese imports.

In the aftermath of his Summit with Kim Jong-un, Trump felt as though he must do something to address the current trade imbalance with China.

Trump stated that if China would impose retaliatory a tariff, then he would likewise impose additional tariffs on to China. China in prompt response to the announcement stated that it will respond with tariffs of equal scale onto the United States.

As a result, stock prices continued to decline with the S&P 500, S&P/TSX composite index, Dow Jones Industrial average and the Nasdaq Composite all dropping with the recent news.

As the trade war progresses, investors can expect global indexes to see further declines with the advent of upcoming news.

The U.S. Federal Reserve hikes rates & Major market indexes fall

interest-rates

The U.S. federal reserve hiked its short-term interest rates by about 25 base points, up to 2% this past Wednesday, with further indication of 2 more this year.

The hike reflects the economy’s resilience, the strength of the job market and inflation that is nearing the Fed’s target level.

Following the decision, the S&P 500 fell 0.4%, while the benchmark 10-year Treasury notes, rose to 2.98 percent. This rate is closely tied to consumer debt, particularly credit cards and home equity lines of credit.

The impact of this hike will be felt largely with a jump in the prime rates and will also be felt in other credits. Short-term borrowing rates will have a higher rate than those considered long-term. Proceeding the increase, consumers will also see a rise in saving rates and a decrease in consumer spending, as impulse purchases will likely decline.

The rise of interest rates is good news for the profitability of the banking sector, but a bad sign for the rest of the sector for global business. Consequently, bank stocks are going to perform favorably and the hike is typically good for businesses that conduct most of their deals in United States.

This is due to local products becoming more attractive due to the stronger U.S. dollar.

OPEC set to raise output results in a plunge in Oil price

Both Saudi Arabia and Russia indicated a rise in oil production ahead of the OPEC meeting in Vienna this week, which sparked a drop in oil prices on Friday.

This rise in output indicates a drop in the price of oil, as Saudi Arabia is the largest producer in OPEC and Russia being the largest producer in the world.

Following the news, crude futures fell, with U.S. West Texas Intermediate dropping 2% to $65.56 USD/barrel.

Much of this is due to the pressure put on by the U.S. when Trump announced in May, that the United States would pull out of the 2015 deal that restricted Iran’s nuclear program in exchange for the removal of sanctions. This put pressure on many European and Asian clients to stop conducting business or importing oil from Iran.

Furthermore, the OPEC meeting will be crucial as it will have a heavy global impact on the markets and energy sectors.


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Ikroop Khanna

Ikroop Khanna is a multifaceted Mcmaster Graduate and Toronto based writer specializing in discussions of trade and the global economy.
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