- Economic data for the week was generally decent, with the ISM manufacturing and non-manufacturing reports showing expansion, an improved willingness of bankers to lend, and a jobs report generally on par with expectations—showing continued growth in a variety of areas.
- Equity markets in the U.S. fell with a few mediocre earnings reports and fears of a Fed rate hike sooner than expected. Bonds were oddly mixed, with results dependent on yield curve status. Crude oil continued to struggle, with lower pricing on the week, which brought down commodity markets overall.
U.S. stocks ended slightly lower on net, with disappointing earnings results and pressure from oil markets. Expectations for the Friday labor numbers played a role, as did comments from a FOMC member suggesting economic data was strong enough to support a September rate hike (earlier than some had hoped).
From a sector standpoint, defensive utilities actually gained a percent and outperformed, while energy and consumer discretionary lagged. Some of the ‘glamour’ stocks of the recent period, including the edgier part of biotech, cybersecurity had issues like Tesla. At the same time, high expectations from blue chips Apple and Disney are being downgraded (due to lower growth targets in China in some cases), creating some negative carryover in sentiment.
Abroad, equities in key areas such as Japan, continental Europe and the U.K. all gained, despite some negative influences of the dollar, which trimmed returns for U.S. investors. The British central bank left rates unchanged, despite some calls for action upward, considering higher wage growth and improved economic conditions. Even China fared well (especially local A shares), despite a sub-50 PMI report, which implies additional government stimulus help to stabilize conditions. In other regions, Brazil also suffered under the scope of a broadening corruption scandal, as did commodity-sensitive regions Australia, Russia and Canada. The reopening of the Greek stock market was disastrous (-30%), with several banks suffering horrendous losses—several of which were capped at daily loss limits. Interestingly, this was one instance where ETFs provided a useful ‘price discovery’ function, as U.S.-listed GREK continued to trade while the Greek market remained closed. This naturally led to some mismatches in fair valuations, since no one had any idea what Greek valuations would look like when markets reopened, but allowed the expression of ‘views’ in the interim (interestingly, GREK amended its prospectus to deal with this issue—allowing for accounting ‘estimates’ of fair value in such cases). The result was the ETF experiencing their big decline before local Greek markets did (which probably would have if they could at the time).
U.S. bonds performed oddly, with lower rates in the cash portion of the curve, higher rates in the middle, and lower rates on the long end. Consequently, long governments gained a few percent, bringing their year-to-date returns to just over zero, high yield bonds lost ground, while most other areas were little changed as a whole. High yield bond indexes have been affected negatively by further declines in energy prices, which affect credit quality of some of the more challenged members of that sector. Developed market foreign bonds were little changed in local currency terms, but lost additional ground due to a stronger dollar. Emerging market spreads widened, resulting in negative returns. This was particularly the case in Brazil, where scandal probes have intensified, affecting pricing of both equity and fixed income markets.
Real estate indexes in the U.S. were generally flat, while Japan and Europe gained. On the negative side, both domestic lodging/resorts and mortgage REITs suffered. This year has been a mixed bag so far, largely reflecting index composition and as a byproduct of M&A activity in the fairly concentrated asset class. Based on recent manager conversations, conditions have continued to demonstrate moderate strength, as tenant demand has grown alongside moderate economic growth—yet to show broad signs of overheating. The supply side—one which we watch closely as this has been a bellwether for any ‘exuberance’ building up (literally as construction cranes everywhere you look at peaks of past cycles)—has remained low with a few exceptions in selected urban pockets. Recent interest rate uncertainty has again pushed broader indexes from near ‘fair’ to again discounted valuations to some extent.
Commodities continued to deteriorate on the week, led by crude oil falling another -7% to just under $44/barrel. Unleaded gasoline plunged by -10%, with other factors such as summer refining activity being a driver. The agriculture bucked the trend with higher prices of wheat and soybeans reacting to reports of higher-than-expected foreign demand, while gold came in flat.
Several energy/materials earnings calls have seen some ‘bottoming’ activity in terms of commodity pricing affecting business activity, and, at some point, and demand/supply balance may again find a sweet spot. However, for now, lower oil prices presumably due to high supplies but also challenged Chinese demand are punishing commodity markets. While this has lowered capex activity in the oil patch over the past year, as operations that were profitable at higher prices aren’t looking as attractive now, this appears to be tapering off somewhat (you can only shut down so many projects). We still seem to be getting used to these new pricing levels (assuming they stay put)—at some point, the damage will have been done and a new set point will have been found. At the same time, the benefits of low energy prices to consumers and businesses continue to be overlooked, which has left a few economists scratching their heads, although this effect can take several quarters to seep through.
|Period Ending 8/7/2015
||1 Week (%)
|MSCI - EAFE
|MSCI - EM
|BarCap U.S. Aggregate
|U.S. Treasury Yields