The historic summit between President Donald Trump and North Korea leader Kim Jong Un in Singapore has created history, possibly ending bitterness that lasted for 68 years.
This is especially true as Trump and Kim signed an agreement, which offers undisclosed American “security guarantees” in exchange for a commitment from North Korea to “work toward complete denuclearization of the Korean Peninsula.” Although this is a positive step, lack of details on the denuclearization process and talks of follow-up negotiation have disappointed Wall Street.
Investors are also a bit wary ahead of the two-day Fed meeting, slated to start today. While the central bank is highly anticipated to raise interest rates for the second time this year by 25 bps, investors are also keenly waiting for the Fed’s guidance on the future rate trajectory. Per CME group, the odds of a June rate hike are 96%. This would also mark the seventh rate hike since December 2015.
Currently, the Fed forecasts a total of three rates hike for this year. Growing inflationary pressures and an improving economy could compel the Fed to add one more rate hike in its forecast for this year. Notably, the Consumer Price Index rose 0.2% in April, bringing the annual inflation (12 months through April) to 2.5% -- the biggest gain since February 2017 and well above the Fed’s 2% target. Unemployment also dropped to 3.8%, the lowest level since 2000.
The economic expansion has survived for nine years and the United States has now entered its second-longest expansion phase since 1785. However, many experts caution the fourth rate hike and expect the Fed to leave its future rate forecast unchanged thanks to tariff and trade threats that could hamper global growth.
Given the mixed outcome of the Singapore summit and the upcoming Fed decision, several corners of the equity space are in focus. Some of these are likely to gain, while some will be hurt by these events.
While gold often carries a safe-haven status in times of economic or political turbulence, it will likely hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. Acting as leveraged plays on underlying metal prices, metal miners generally witnessed more gains or losses than their bullion cousins. As such, the largest gold mining stocks - Newmont Mining Corporation (NEM - Free Report) and Barrick Gold Corporation (ABX - Free Report) are on investors’ radar. Both stocks have a Zacks Rank #3 (Hold).
A rising interest rate scenario would be highly profitable for the banks, as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Fifth Third Bancorp (FITB - Free Report) having a Zacks Rank #1 (Strong Buy) is poised to surge the most from the Fed’s hawkish outlook. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While faster-than-expected tightening policy would hurt demand for high dividend stocks, any negative talks in the negotiation of Trump-Kim deal would drive investors’ attention to this corner of the space. This is because companies that pay higher dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. Summit Midstream Partners LP (SMLP - Free Report) , which carries a Zacks Rank #1, has a higher upside potential.
Though higher rates would raise the borrowing cost, an improving domestic economy and a Trump-Kim deal would continue to boost confidence, leading to higher spending power. While most of the stocks in the space are top ranked, lululemon athletica inc. (LULU - Free Report) with a Zacks Rank #1 and a Momentum Score of A could outperform.
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