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Market Recap Friday, May 19

On Oil: Prices Jump to Three-Week High on Talk of Extending Production Cuts

Oil prices jumped to a three-week high on May 15. U.S. crude futures rose to $48.85 a barrel on the New York Mercantile Exchange and Brent rose to $51.82 a barrel on ICE Futures Europe. The move capped a four-day streak of gains for oil prices, lifting both benchmarks to their highest levels since late April. In a joint statement, Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak said a pact by the Organization of the Petroleum Exporting Countries and external producers, including Russia, to cut output by some 1.8 million barrels a day should be extended to the end of March 2018.

On U.S. Dollar: The U.S. Dollar remains soft with both EUR and GBP rallying

The USD has been a soft undertone as it struggled to rekindle the sort of form that saw it rally broadly, and strongly, in the immediate aftermath of the US presidential election in 2016. The Trump administration’s early policy setbacks, which investors fear will slow the broader drive for tax reform, deregulation and fiscal stimulus, account for some of the USD’s underwhelming performance in April. Geopolitical concerns, such as Asia, and political developments in Europe have also undercut the USD more recently. Finally, the U.S. economy appears to have stumbled out of the starting blocks this year again, which weakened the market’s confidence in the Federal Reserve’s ability to tighten monetary policy over the balance of the year.

On U.S. Markets: Stocks and Bond Appear to Be Telling Different Stories about the U.S. Economy

Stock and bond markets appear to be telling different stories about the U.S. economy, with stock prices climbing and bonds holding relatively steady. While strength from Technology remains notable, performance is not at a historical extreme. While the Nasdaq 100 has certainly been a standout performer, it has been significantly more stretched before.

Yields remain near 2.30%, the bond proxies and defensive groups continue to underperform. In addition to geopolitical risks in Syria and North Korea, several other factors continue to argue for a low-yield environment that is broadly range bound, including that inflation fears are contained, U.S. and Chinese economic data are showing signs of weakness, and the European Central Bank and Bank of Japan remain accommodative.

Bank of Canada on Hold, Assessing Uncertainties in Nation’s Economy

The April Bank of Canada (BOC) monetary policy statement was mildly hawkish: It acknowledged the recent stronger growth and better-than-expected economic data, yet revised down the forecast for the potential GDP growth rate. U.S. policy, especially trade, is by far the greatest source of uncertainty to Canada’s outlook. Any movement toward U.S. protectionism would have a major negative impact on the Canadian economy. Recognizing this risk, the BOC mentions U.S. trade policy often in the latest Monetary Policy Report.

The reliance on U.S. policy highlights one of the weak points in the Canadian economy: its persistently underwhelming exports, especially in non-commodity sectors. A key question for policymakers is whether this weakness is structural or cyclical. The BOC needs more time and data to make that assessment.

The housing market is clearly a concern for the BOC. Its 2017 forecast revised down housing’s contribution to GDP growth, demonstrating caution on the Toronto housing market as its boom continued in the first quarter of this year. The surge in home prices presents real risks to the macro economy, and residential investment and consumption as a percentage of GDP is very high by historical standards. As people “consume” a lot of housing and go deeper into debt doing so, they effectively borrow that consumption from the future. This means we can’t rely on Canadian consumers to be the main drivers of real GDP growth the way they have in the past – a vulnerability the BOC has consciously incorporated in its growth forecast.

A Couple Thoughts

With equities delivering strong returns since the post-crisis bottom in 2009, simple exposure to equity beta, or the market’s return, has been enough for many investors to achieve their return targets. While in the coming years, with equity returns likely to be significantly lower compared to recent levels.

A recent study by Morningstar revealed that only 14% of U.S. large cap managers outperformed their passive counterparts over 10 years, and only about 30% of managers outperformed in the perceived less efficient areas of small cap, international and emerging markets. Low returns, scarcity of alpha and the tendency to chase performance. With all of these challenges, how does an equity investor achieve higher returns going forward?

Part of the answer lies in portfolio structuring: that is, reallocating away from traditional passive and active strategies and toward structural or systematic approaches that may offer more reliable sources of returns. To be sure, investing in nontraditional equity strategies requires education and the ability to navigate an evolving landscape. But the potential rewards – achieving higher returns in an environment where beta alone may no longer be enough could be meaningful. Rethinking traditional approaches and moving toward strategies that benefit from systematic and structural sources of returns may help investors to achieve the excess returns they seek.

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Market Recap Friday, May 5th

China: Commodities Slump Weighs on Stocks, PMIs Losing Momentum

A slump in Chinese metals prices and weakness in crude oil sent equity markets across the region lower. Oil price tumbled 3% from Thursday’s settlement in New York while trading sentiment was already weak amid fears that Beijing’s crackdown on speculation and borrowing could hurt metals demand. The Hang Seng subindex that tracks Chinese shares also widened losses. Meanwhile, investor worries of China’s regulatory crackdown on speculative trading sent commodity futures prices sharply down for a second straight session.

China’s private sector mfg PMI fell to 50.2 in April due to cost saving layoffs, slower output and new orders, and lower confidence. The Service PMI slipped as well, but indicated Services are doing better than Mfg. China has been a factor in the nominal global reacceleration. But as policymakers tighten, China’s growth should slow. A handoff to U.S. fiscal stimulus is crucial. Right now, solid corporate earnings are helping prolong investors’ patience.

Japan: More Evidence of An Upturn

The Services PMI softened in April, but remained in expansionary territory. Input prices and business confidence cooled slightly while new orders, output, hiring, and backlogs of work rose marginally. The robustness of the fourth quarter and the first quarter appears to be moderating in the second quarter, but respectable growth will likely continue.

Auto sales had another good month in April. According to the BoJ minutes from March’s meeting, the central bank thinks private consumption has been resilient thanks to the sturdy labor market. This is evident for durable goods purchases, but less so for overall retail sales.

U.S: 16 Non-Manufacturing Industries Reporting Growth in April

In April, upward pricing pressure in the industries strengthened as the Non-Manufacturing Prices Index (57.6, +4.1) accelerated, making prices greater than the 2016 average of 52.7. However, inflation only becomes worrisome when the Index prints above 60 for more than a quarter. The 16 non-manufacturing industries reporting growth in April, listed in order, were: Wholesale Trade, Utilities, Arts, Entertainment & Recreation, Mining, Retail Trade, Construction, Professional, Scientific & Technical Services, Information, Management of Companies & Support Services, Public Administration, Health Care & Social Assistance, Real Estate, Rental & Leasing, Other Services, Finance & Insurance, Accommodation & Food Services, and Transportation & Warehousing. The only industry reporting contraction in April was Agriculture, Forestry, Fishing & Hunting.

House Panel Approves Plan to Undo Parts of Dodd-Frank Financial Law

The House Financial Services Committee launched a Republican-supported rollback of Obama-era financial regulations, voting 34-26 along party lines May 4 for a plan to undo significant parts of the 2010 Dodd-Frank law. The committee vote sent the Financial Choice Act to the full House. Here are key details of the bill:

  • It would require a failing firm to go through bankruptcy proceedings instead of a process through Dodd-Frank in which regulators liquidate the firm outside of bankruptcy, called the Orderly Liquidation Authority.
  • Healthy banks would get significant regulatory relief from restrictions on capital and dividend payouts so long as the bank maintains an average leverage ratio of at least 10%.
  • It would modify capital rules to give banks more flexibility in how they guard against “operational risks” like big-ticket legal liabilities.
  • The CFPB would be stripped of its powers to supervise firms and pursue certain fair-lending violations that are “unfair, deceptive or abusive acts or practices,” known as Udaap. The CFPB could enforce other consumer financial protection laws.
  • All companies would be allowed to communicate confidentially with the Securities and Exchange Commission about potential initial public offerings and withhold company communications with regulators from investors.
  • It would prohibit the SEC from completing a rule aimed at giving activist investors more firepower to defeat company board candidates.
  • It would give outsiders more input on the SEC’s enforcement priorities and strategies by requiring the agency to create an advisory committee to “offer recommended reforms.”


Still, given the accuracy of the first round opinion polls, Macron will likely win the presidency. But concerns about populism are likely to return, especially with the upcoming (probably 2018) Italian election. Against this backdrop, Brexit negotiations have also turned more antagonistic.

The ADP report showed private payrolls expanded by +177k jobs in the U.S. in April. The FOMC reiterated in its statement that the committee is looking past the noise in 1Q. It is likely that the Fed will raise rates in June. While the U.S. mfg PMI is peaking, svc growth remains solid, and inventory rebuilding should help growth going forward.

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Market Recap Friday, April 28th

Global stock markets rallied after a centrist candidate won the first round of France’s presidential election. French stocks and the euro both gained after Emmanuel Macron, above, and Marine Le Pen advanced in the French Presidential election. Other risky assets, such as emerging-markets currencies and junk bonds, also rallied. The U.K. economy is showing some signs that the Brexit drag is still ahead of us, and the snap election is scheduled for June 8th. However, general risk from Europe has faded with Macron in the lead in the French election. The global story generally remains one of a synchronized recovery. With inflation rising modestly as oil prices stabilized relative to the low of $26 in 2016, and China growth has reaccelerated. Nominal growth, which is supporting corporate earnings, remains the bridge in 2017 to get to U.S. fiscal stimulus. There remain some risks, but the synchronized nature of global growth, combined with still-easy policy in many areas is helping risk assets look past many of these items. The CBOE Volatility Index, or VIX, a measure of anticipated stock-market volatility sometimes called the “fear gauge,” dropped 26%—its largest one-day fall since 2011. Bank shares rallied around the world.

Nasdaq Composite Tops 6000 for First Time

The Nasdaq Composite raced past 6000, the latest sign that technology companies have become a driving force in the recent stock-market rally. The index hit the milestone 17 years after it reached 5000 during the dot-com era, in a broad rally April 20 that was turbocharged by earnings from bellwether companies, those market leaders in the respective sectors. Surging technology shares have helped the index outperform its peers so far this year. The top five contributors to the Nasdaq’s 2017 gains, Apple Inc., Facebook Inc., Amazon.com Inc., Microsoft Corp., and Alphabet Inc.

French Vote Fuels Hopes for Growth

Mr. Macron won the first round with 24% of the vote, ahead of Ms. Le Pen with 21.3%. The ascension of centrist Emmanuel Macron as the heavy favorite in France’s presidential race spurred investors to set aside the political worries that have long plagued European markets and to make new bets on economic growth. Mr. Macron is now seen as the leader in May 7’s runoff against second-place finisher Marine Le Pen, whose pledge to dismantle the euro had damped prices of euro assets and the common currency itself. The former investment banker’s good showing sent stocks and the euro sharply higher while triggering a sharp selloff in German government bonds, which investors had bought as a haven from populist politicians such as Ms. Le Pen.

Thought: Managed Futures Strategy in an Uncertain World

Managed futures strategies, also known as trend-following or momentum strategies, seek to generate attractive returns by capturing price trends across major asset classes, have been around since the 1980s. Historically, investors have been drawn to these strategies mainly for their diversification benefits and their potential for equity-like returns. Because of their low-to-negative correlation with many risk assets, managed futures funds may help to lower overall portfolio volatility and contain drawdowns. Ideally, managed future funds should demonstrate their best performance during equity sell-offs, when investors need returns the most. In choppier markets without clear trends, performance may be down or muted.

With low annual returns expected for mainstream stocks and bonds over the next decade, and asset prices in both the equity and bond markets near all-time highs, investors are looking to alternative strategies for return and diversification potential. As such, investors have been allocating to managed futures strategies, which offer the potential for both. Trend-following, the primary approach used in managed futures strategies, has generally delivered strong returns over multiple decades.

Managed futures strategies are all designed differently so there is considerable disparity among these funds. Trend horizons, portfolio construction and risk management criteria are three main factors that determine the nature of a managed futures fund. As impactful as managed futures strategies can be, their impact on the overall portfolio depends on the size of the allocation. Many investors incorporate managed futures into their overall alternatives allocation, which can often range from 10% to 30% depending on the investment objectives and the role of managed futures in the portfolio.

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Market Recap

Global Markets Pressured: Gold, Yen, Bonds Gain as Investors Step Up Safety Plays

Equity markets stayed under pressure on Friday, while the yen and oil prices rose sharply, after the U.S. launched cruise missiles at a Syrian air base in response to a recent chemical attack. The announcement of this first U.S. military operation to deliberately target the regime of President Bashar al-Assad came midmorning for many Asian-Pacific markets, and pushed investors into haven assets like the yen, which jumped about 0.6% against the U.S. dollar in the moments after the news. Still, safe-haven assets remain in favor, with the yield on the benchmark 10-year U.S. Treasury falling to 2.3122%, from 2.3430% late Thursday. London spot gold prices were recently 1% higher.

Oil prices also surged, as concerns about supply disruptions from the military offensive in the region registered with investors. Brent crude, the global oil benchmark, was recently up 1.7% at $55.79 a barrel. In stocks, Australia’s S&P/ASX 200 was last down 0.2%, while in Hong Kong, the Hang Seng Index was off 0.5% and the FTSE Straits Times Index in Singapore fell 0.6%. Chinese gold miners listed in Hong Kong were up sharply in the morning session, as investors hedged their bets in the wake of Syria attack. In Japan, the Nikkei Stock Average recovered from slight losses following news of the attack, and was last up 0.4% following Thursday’s marked decline.

U.S. Consumer Confidence Soars as Corporate Profits Recession Ends

U.S. corporate profits jumped 22.3% in the fourth quarter of 2016 compared with the same period in 2015, which was the largest year-over-year gain for the measure since the first quarter of 2012. For all of 2016, profits rose 4.3% from the prior year, the strongest calendar-year profits growth since 2012. In addition, U.S. consumer spending in the fourth quarter was stronger than expected, offset in part by downward revisions for business investment, net exports and spending by state and local governments, according to the United States Department of Commerce.

U.K. Consumer Sentiment: Investors Wait Brexit Gets Away

The GfK NOP consumer confidence indicator was minus 6 points in March, unchanged from February’s figure. The index remains entrenched in negative territory, where it has been since April of last year, highlighting that consumers are still broadly pessimistic. March’s figure reflects an improvement in consumers’ personal financial situations over the last twelve months and an increased likelihood of making major purchases. Consumers’ sentiment regarding their personal financial situation over the next twelve months, the general economic situation over the last twelve months and the general economic situation over the next twelve months remained unchanged compared to the prior month. Consumers’ general pessimism comes amid a backdrop of rising inflation, mediocre wage growth and high levels of political uncertainty generated by the recent triggering of Article 50.

Germany: Consumers in Germany Remain in Spending Mode

German economy looks in good shape, with growth rising and inflation subsiding. The latest data showing GDP grew 0.4% in the fourth quarter of 2016 and 1.9% as compared with the prior year period, which was the strongest in five years. Unemployment in Germany fell to its lowest level since reunification in March and could fall lower. Total unemployment in Europe’s largest economy dropped to 2.662 million from 2.762 million in February.


China: PMI in March Below Expected

The Caixin Manufacturing PMI in China fell to 51.2 in March of 2017 from 51.7 in February and below market consensus of 51.5. While output and new orders eased amid softening business confidence, new export orders rose the least in three months and staffing levels continued on a downward trend. Meanwhile, backlogs of work increased further. Stocks of purchases declined slightly while inventories of finished goods fell the most in ten months. Input prices and output prices remained high, although they have dropped for three straight months.

Why the Refinancing Slowdown Matters for the Fed

The Federal Reserve has been buying up fewer mortgage bonds in recent months thanks to a flameout of the American refinancing boom, one factor that economists say is likely to help shape Fed officials’ thinking as they consider shrinking their giant bond portfolio. Because the Fed is buying up less of the mortgage bonds currently in the market, in many ways monetary policy is already tightening on its own. The Fed could view it as a step toward shrinking its $4.5 trillion balance sheet, as it considers whether to begin selling some securities later in 2017 after years of stimulative bond buying. At their policy meeting in March, Fed officials agreed that they would probably start shrinking their portfolio later in the year but did not decide on key details of how to do it.

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Market Recap

On Economy

Voluntary job separations continue to trend higher in the U.S., which is a healthy sign. Additionally, the NAHB housing market index hit a new cycle high in March.

The Fed is picking up the pace in its quest for normalization. The central bank raised rates +25bp, putting the fed funds rate target in a 0.75%-1.0% band. The Fed remained committed to a gradual pace of rate hikes in 2017. The neutral level of the federal funds rate remains low, and just a few more rate hikes will move to that neutral rate quickly.

While the data-dependent Fed is in a tightening cycle, and the data is good enough to continue. The Fed’s forecasts haven’t changed much, and the FOMC members are still not discussing in detail particular fiscal policy measures. Chair Yellen did note that the Fed balance sheet was discussed at last week’s meeting, but no decisions were made and more work needs to be done. There is no specific fed funds rate that would trigger a balance sheet decline, but rather a sense that the economy will continue to make progress plus confidence that there is no particular concern about adverse risks.

On Energy

European stocks and U.S. futures edged lower Monday as a pullback in oil prices pressured shares of oil and gas companies. Declines in the oil price kept shares of energy companies depressed with Brent crude oil last down 0.4% at $51.55 a barrel, weighed by signs of increased drilling activity in the U.S. Italian bank shares edged up 0.3%.

On Stocks

Stocks in Europe and Asia pulled back Wednesday after major U.S. indexes posted their steepest decline of the year. The Stoxx Europe 600 was down 0.8% in the early minutes of trading and Asian markets were lower across the board amid a retreat in global bank shares. Futures pointed to a 0.3% opening dip for the S&P 500. Continued weakness for the dollar this year is likely contributing to the strength in many global markets. Consumer Discretionary is about as scattered of a group as we can remember in some time. On one side, the Retail stocks remain in pronounced downtrends with many on the verge of or hitting new lows this week. Aside from Internet Retail, it remains a difficult space to be.

The small-cap rally that took Wall Street by storm late last year has petered out. Shares of smaller companies have lagged behind the market this year, underscoring investor concern over the likely timing of economic-policy changes by President Donald Trump’s administration and rising U.S. interest rates. The Russell 2000 index of small-cap companies is up 2.5% this year, while the S&P 500 is up 6.2%. Small-caps rose 14% between Election Day and the end of 2016, while the S&P 500 climbed 4.6% over the same timeframe.

White House Preps Pair of Executive Orders on Trade

Trade is likely to move back into the spotlight in the next few weeks as the White House prepares to release two new executive orders: one ordering a reexamination of all existing trade deals, and one aiming to review and change procurement policies. Both orders would represent steps toward fulfilling some of Trump’s signature pledges. The executive orders also have added the benefit of changing the current narrative from more damaging stories involving the White House to a place where the president can really shine.

Interesting Charts

Lipper Large-Cap Core Ave Return Relative S&P 500 Total Return vs. CPI

Annual S&P 500 Performance vs. % of Active Managers Outperforming

Sector Performance during Fed’s Balance Sheet Expansion

A Look at the Markets Eight Years Later

S&P 500 Historical Bull Markets 1928 to Present

Tax Reform High on Trump Agenda as U.S. is Least Competitive

Source: Strategas Research

A Few Thoughts

Higher bond yields, whether they signal a healthy economy or stretched stock valuations, appear to have staying power. U.S. bond yields are topping a key measure of the dividends that large U.S. companies pay, which is a shift that has broad implications for investors who have viewed higher stock yields as underpinning an eight-year-long bull market. According to FactSet, at 2.50%, the yield on the 10-year U.S. Treasury note last Friday exceeded the 1.91% dividend yield on the S&P 500. The dividend figure reflects annualized payouts by companies in the index as a proportion of their current share price. Rising bond yields generally send a signal that the economy is healthy and that demand for goods and services is rising. But increases in long-term yields over time also stand to shift investor preferences that recently have been strongly skewed in favor of stock investments.

Credit risk is a strong driver of both bond and equity performance. What is more, the fear that a weak credit will continue to slide is one of the most pronounced risks to individual stocks. Simply put, liquidity cannot solve a solvency problem, but lack of liquidity can make solvent credits insolvent, thereby drastically reducing the equity stake in an otherwise viable name. As such, when credit markets close in on a name, equity investors need to take notice. The names and sectors may not surprise, with energy still the highest risk sector. High yield default rates hit a near-term peak of about 4.6% for 2016, and appear to be heading lower in 2017. Currently, high yield spreads imply about a 3% default rate for the next 12 months. Energy is still the outlier group within the S&P, with estimated default risk of about 1.5%. This is still 3 times the next closest sector, basic materials, and is reflective of still high debt loads and volatile asset prices. Financials come in as the third most at risk sector, at roughly 0.35%.

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Market Recap

Stocks Rise After Jobs Report

Stocks rose Friday following February jobs report, which indicated increased hiring. The S&P 500 Index grew 0.3%, the Dow Jones Industrial Average rose 45 points, and the Nasdaq Composite added 0.4%; the S&P 500 Index recorded its first weekly decline since January 2017. The CBOE Volatility Index (VIX), the most prominent gauge of Wall Street uncertainty, is near its lowest level on record, confounding those who believe uncertainty is only growing.

Petroleum Consumption and Production Growing

The International Energy Agency (IEA) said on Monday that global petroleum consumption will keep growing for the foreseeable future, despite tougher legislation to control vehicle emissions, lending its voice to a debate over when demand for oil might peak. In its annual five-year outlook, the IEA said oil demand from the developing world would keep consumption growing. Supply data from the Energy Information Administration released on Wednesday showed crude-oil stockpiles rising by 8.2 million barrels in the week ended March 3. That dwarfed the increase of 1.7 million barrels the market was expecting. U.S. inventory levels have been on the rise for nine weeks in a row; they hit a record of 528.4 million barrels last week as both imports and U.S. production increased. Moreover, the Organization of the Petroleum Exporting Countries (OPEC) is on an unusual listening tour, in which it exchanges views with hedge funds, investment banks and other big financial players while trying to figure out how the market reacts to its moves.

FOMC Likely to Raise Rates in March

After upbeat speeches from several Fed officials last week, Chairwoman Janet Yellen confirmed that the central bank is likely to raise short-term interest rates and suggested more increases are likely this year if the economy performs as expected. The dollar edged higher Monday as investors continued to grow more confident that the Federal Reserve will raise interest rates this month. The WSJ Dollar Index rose 0.2% to 91.67; the dollar fell against the Japanese yen but rose against the euro and British pound. Higher short-term interest rates typically boost the value of the dollar by making U.S. assets more attractive to yield-seeking investors.

Central banks around the world are increasing foreign-currency reserves, highlighting the fragile underpinnings of the global economic recovery despite a bullish mood in financial markets. In emerging economies, reserve levels have stabilized after two years of big declines. Two-thirds of the 30 biggest emerging markets increased reserves last year. Foreign-currency holdings in Israel, Vietnam and the Czech Republic recently reached new records. China’s foreign reserves rose by $6.9 billion in February compared with the previous month, rebounding for the first time in eight months and pushing the reserve total back above the $3 trillion mark.

A Few Thoughts

All investing is a form of value investing and other styles are forms of speculation. Take value investing through a contrarian approach for example, it is not about blindly taking the other side of consensus, but identifying uncertainty and embracing it. Investors should be cautious on ideas where there is a strong consensus around a singular narrative, e.g., strong dollar. There are opportunities for contrarian investing in retail today.

The VIX is near its lowest level on record, confounding those who believe uncertainty is only growing. A decline in volatility around important political votes may create opportunities for money managers willing to take on risk. It took markets four days to recover from Brexit, around four hours to recover from Donald Trump’s election victory and some four minutes to spring back from the Italian referendum. Over the past year, every new bout of political-inspired drama in the markets has corrected more swiftly than the last. It may be that fund managers have decided to hold back more cash ahead of these events, waiting to see how they pan out.



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Market Recap

As widely anticipated, the FOMC unanimously raised the federal funds rate by 25 bps at its December two-day meeting as the committee found current labor market conditions and inflation sufficient. The move by the Federal Reserve was near-certain, but what remains uncertain is the Fed’s rate path for 2017. The materials released show the FOMC aims for three rate hikes next year – more than three would be risky – and reinforces the committee will remain data dependent. This time last year, the Fed aimed for four rate hikes the following year. Yet, international events and uninspiring data throughout the year sidelined the Fed. Thus, only one rate increase occurred in 2016.

Data dependency allows the committee the freedom to respond how it sees best, especially next year which holds great uncertainty from the shifting political landscape. Furthermore, the strength in the US$ has functioned as a tightening of financial conditions in its own right. Yet, market participants tuned into Chairwoman Yellen’s press conference to try deducing from her words any further guidance. During the Q&A session of the press conference, Chairwoman Yellen refused to speculate or give any instruction about fiscal policy, confirmed she intends to serve her four-year term, and emphasized the outlook is too uncertain and thus, the committee will adjust its stance as visibility improves.

Global Equity Markets

Global equity markets have shown a fair degree of volatility in 2016, initially impacted by expectations of weakening global growth and tumbling commodity prices, and then by the uncertainties resulted from the outcomes of the Brexit decision, and more recently Donald Trump’s election to the White House.

On U.S. Equities

Despite the environment and the uncertainties surrounding the Trump administration, investors appeared focused on the president-elect’s promises of expansionary fiscal measures, and the performance of the U.S. equities remained resilient. As of December 19, 2016, the S&P 500 Index rose 10.48%[1] year to date, with the S&P 500 Value Index grew by 15.10%[2] and the S&P 500 Growth Index by 6.12%[3] during the period. Meaningful dispersion returned across equity sectors: A steeper yield curve and the prospect of a shift toward deregulation buoyed financials, while the treat of trade barriers weighed on technology companies dependent on global supply chains. More interest-rate-sensitive sectors such as utilities also underperformed in the month. In addition, small-cap stocks performed well on the potential for reduced competition from foreign firms and a more pro-business domestic political environment, as evidenced by the 10.27%[4] gain in November and 20.03%[5] gain year to date.

On Non-U.S. Developed Markets Equities

The Euronext 100 Index was up 2.14%[6] as of December 19, 2016 and the FTSE 100 Index ended the period up 11.99%[7]. After being pounded for months, the European banking sector is back in vogue, as evidenced by the fact that the Stoxx Europe 600 Banks Index turned positive year to date, a huge reversal for the sector that spent the year as one of the region’s worst performers. Spurred by the prospect of looser regulations and higher interest rates, investors are piling back into the sector. The Australian equity markets, as measured by the S&P/ASX 200 Index, returned 5.11%[8] year to date. Japanese equities rallied on the back of a weaker yen and modestly higher yields, benefitting export-oriented firms and financial companies, respectively; financials have led the Japan equity market to a fresh high for 2016.

On Emerging Markets Equities

In emerging markets, the potential for protectionist trade policies in the U.S. under the Trump administration and a stronger U.S. dollar weighted on returns. Emerging markets equities experienced their largest monthly drawdown since January. Brazilian equities fell 4.6% in November amid a renewed focus on political corruption in the President’s cabinet. Indian equities also fell 4.5% as investors feared that Prime Minister Modi’s currency crackdown could prove disruptive to the cash-dependent economy. Chinese equities, however, gained 4.8%, pushing stocks into bull market territory as government efforts to curb surging property prices may be driving more investment toward the stock market. Russian equities rallied the most among emerging markets, returning 5.8% during the month in reaction to President-elect Trump’s apparent willingness to mend relations with Moscow.

Global Credit Markets

Yields in global credit markets spiked to levels not seen since the end of March as a Fed rate hike in December appeared to be a near certainty, and global investment grade credit returned – 2.0% for the month of November. While spreads widened modestly during the month, overall they have tightened about 60 bps from the wide levels in February, due to continued strong investor demand for stable income above that of global government bonds.

On U.S. Credit


Developed market yield soared in a post-election reflation trade: Investors priced in greater potential for fiscal expansion and infrastructure spending in the U.S., along with a faster Fed hiking path. The reaction was strongest in the U.S., where the 10-year Treasury yield jumped 56 bps to 2.38%. As rates on the long end of the yield curve climbed higher, the spread of 10-year yields over two yields widened 28 bps.

On U.S High Yield Bonds

As investors contended with the sharpest increase in Treasury yields since the Taper Tantrum in 2013, global high yield bonds experienced their first monthly loss since January. Yields rose by close to 30 bps over the month but were far outpaced by the increase in government rates, resulting in spreads that were narrower by about 10 bps.

On Non-U.S. Credit

Other developed markets followed suit, with the German 10-year higher by 17 bps. In Japan, 10-year rates inched into positive territory during the month, but ultimately ended only 7 bps higher at the new target of about 0% after the Bank of Japan successfully defended its new yield curve targeting policy through open market operations.

On Inflation-Linked Debt

Global inflation-linked bond (ILB) markets lost ground in November as rates across the globe moved sharply higher. In the U.S., breakeven inflation rates suddenly jolted higher in the wake of the surprise presidential election result. Ten-year inflation expectations in the U.S. ended the month at their highest level in more than two years as investors perceived Present-elect Trump’s proposed policy measures as inflationary. An OPEC-induced rally in crude oil prices at month-end also served as a tailwind for breakeven inflation rates. The election results reverberated through other ILB markets as well: most notably. Mexican inflation expectations skyrocketed as the peso sharply depreciated, and yields spiked as the Bank of Mexico attempted to curtail the impact of the currency decline on inflation.

On Emerging Market Debt

EM debt assets came under considerable pressure in November following the U.S. presidential election. President-elect Trump’s campaign rhetoric raised uncertainty about the future of global trade agreements, and EM economies most reliant on the current global trade construct posted the weakest returns. Even as developed market yields moved higher, index spreads over U.S. Treasuries for EM external debt widened, EM local yields rose and EM currencies weakened considerably against the U.S. dollar. Investors pulled nearly $10 billion from the asset class, with the outflows serving as an additional headwind. Bucking the trend, oil exporters across the EM universe generally outperformed as OPEC reached a long-awaited agreement to cut production, sparking a rally in crude oil prices on the final day of the month.


The U.S. dollar surged in November. It gained against nearly all global counterparts as Treasury yields soared following the surprise election of Donald Trump. Among G10 pairs, the Japanese yen was notably weaker – down more than 8% against the U.S. dollar – as the interest rate differential between rates in the U.S. and those in Japan widened. The dollar also strengthened substantially against EM currencies on concerns over more protectionist U.S. trade policy under the new administration. The Mexican peso fell almost 9% versus the dollar for the month. China, frequently in the crosshairs of the president-elect, fixed its currency weaker as capital outflows showed little sign of abating. The British pound was the lone currency to beat the dollar on the month after the U.K. high court indicated parliamentary approval is necessary to trigger the country’s exit from the EU.

[1] Google Finance. Retrieved from https://www.google.com/finance

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