Market Update - September 18, 2019Submitted by Jodi Vleck , Beta Wealth Group on September 18th, 2019
U.S. equities fared well last week, with optimism about a U.S.-China trade deal rising again due in part to Chinese authorities publishing a list of tariff-exempted products and higher purchases of U.S. agricultural products and in response, a 15-day tariff increase deferral (from October 1 to October 15) on $250 billion in imported goods by the U.S. administration. Small cap and value equities led the way while momentum names lagged, in a reversal of the trends we have become used to in recent years. By sector, financials/materials/energy equities led the way with 3%+ gains, while the consumer staples and technology sectors lagged with modest weekly losses. On the economic front, the news largely painted the picture of a decelerating US economy, with a light August payrolls report and a sub-50 print on the ISM manufacturing index signifying slowing industrial activity.
Foreign equities in markets such as Europe, Japan and emerging markets generally rose in line with domestic equities, once again driven by positive U.S.-China trade sentiment. The European Central Bank cut its key deposit rate to -0.5% (from -0.4%) and restarted quantitative easing (QE) measures of up to €20 bil./month, beginning in November, which was underwhelming relative to expectations, but nevertheless still meaningful. From a legal and practical standpoint, QE has the potential to become more problematic, given that there are statutory limits as to the magnitude of each individual EU nation’s bonds that can be purchased.
U.S. bonds experienced an atrocious week with both Treasuries and Investment-grade corporates down 2%, as long-term yields rose sharply higher. High yield bonds and floating rate bank loans actually gained some ground, while foreign bonds were mixed with developed market sovereigns declining, though to a lesser extent than a weaker dollar. Emerging market bonds were sharply lower in US Dollar terms, but local currency EM debt gained ground.
Real estate markets lost ground contrary to US equities, hurt by the rise in long-term interest rates, while global real estate markets ended slightly higher. Commodities' performance was largely mixed, with areas such as agriculture and industrial metals experiencing gains while energy and precious metals lost ground for the week. While natural gas prices rose 5%, the price of crude oil fell by 3% to just under $55/barrel as markets absorbed an International Energy Agency (IEA) report noting a global oil supply glut, although attacks on Saudi Arabian oil production assets representing up to half of export volumes will likely act as a near-term floor on corresponding oil prices as we evidenced on Monday morning.