A look back on what was a volatile second quarter for financial markets.
July 5th, 2018
US equities advanced in Q2, with positive earnings momentum and supportive economic data ultimately outshining escalating US-China trade posturing. Consumer confidence remained strong and retail sales data suggested a rebound in consumption from a softer Q1. The unemployment rate also reached an 18-year low of 3.8%, accompanied by robust wage growth. Average earnings in May were 2.7% higher than a year earlier. As expected, the Federal Reserve (Fed) raised the target rate for Fed Funds by 0.25% and marginally increased its 2018 forecasts for growth and inflation. It now anticipates two further rate increases for this year and three for next.
The positive economic data was, however, balanced by moves from the Trump administration to impose tariffs on Chinese imports, and withdraw from the Iran nuclear accord. In combination, the steps amounted to a more combative trade posture from the US, driving oil prices higher, and weighing on longer-term growth expectations.
Over the quarter, energy, consumer discretionary and technology stocks performed well, while a rotation into more traditionally defensive areas supported real estate and utilities. Industrial stocks were weaker given the discussions surrounding trade sanctions, and financials were weaker due to a flattening of the yield curve (outlined below).
Eurozone equities posted positive returns in the second quarter. Top performing sectors included energy, information technology and healthcare. Financials were among the main laggards, posting a negative return; Italian banks in particular struggled amid political uncertainty in May. Elsewhere, auto stocks fell against a backdrop of intensifying trade concerns as US President Trump threatened tariffs on imported vehicles.
The quarter was marked by the return of political risk. There were concerns that Italy could need fresh elections following the inconclusive outcome of the March vote. Markets feared that this would turn into an effective referendum on Italy’s membership of the euro. However, a governing coalition was eventually formed between populist parties, the League and the Five Star Movement. Spain also saw a change of government, although this was largely greeted with calm by markets. Late in the period, German Chancellor Angela Merkel clashed with sister party the CSU over immigration policy.
Economic data from the eurozone pointed to steady growth but at a slower pace than last year. GDP growth for the first quarter was 0.4%, down from 0.7% in Q4 2017. However, the flash eurozone composite purchasing managers’ index for June came in at 54.8, an improvement on the 18-month low of 54.1 seen in May. The European Central Bank (ECB) announced that it expects to end its quantitative easing program in December 2018. The ECB added that interest rates will remain at current levels through the summer of 2019.
The FTSE All-Share index rose 9.2% over the period, enjoying strong relative performance versus global equities. UK equities bounced back as international investors reduced their underweight in the country, albeit sentiment towards the UK remains extremely negative. Prior to the period under review, the UK’s unpopularity with international investors had hit levels not seen since the global financial crisis. This situation had weighed heavily on UK returns at a time when investor sentiment in general was fragile, amid fears that resurgent inflationary pressures in the US could derail the “Goldilocks scenario” of low inflation and stable growth.
The absence of a rate hike was a further positive for UK equities, as it contributed to a renewed decline in the value of sterling against a strong US dollar. As a result, the more internationally exposed large caps outperformed mid-caps. Ongoing merger and acquisition activity also supported returns over the period.
The oil and gas sector performed very well, in line with higher crude oil prices. These climbed in response to robust global demand, continued supply discipline and geopolitical uncertainty after the US withdrew from the Iran nuclear agreement. Trade war rhetoric resumed towards the end of the quarter, negatively impacting financials and other areas of the market exposed to emerging markets, which appear vulnerable to escalating trade tensions and the strong dollar.
Sterling performed poorly after the Bank of England backed away from a much-anticipated rate rise (in sharp contrast to an increasingly hawkish Fed). This followed a raft of disappointing macroeconomic data, which culminated in the Bank reducing its 2018 growth forecasts – it is now expecting the UK economy to expand by 1.4% this year, versus 1.8% previously.
Despite generally weak sentiment during the past three months, the Japanese equity market showed a positive total return of 1.1% for the quarter. Although further uncertainty was created by rising trade tensions, the Japanese yen lost ground against a generally stronger dollar.
The results season for the fiscal year which ended in March was completed in early May, with profit numbers broadly in-line with expectations after a period of successive upward revisions in the second half of 2017. Companies’ own expectations for the year to March 2019 appear to be rather conservative, partly as a result of the stronger yen rates prevailing at the time the forecasts were made, which potentially leaves room for upward revisions later in the year.
Much of the quarter was very quiet in terms of Japan-specific news, with investors focused instead on escalations in trade tension between the US & China and increased strains within the European Union. The most important aspect for Japan has been the increased potential for the US to apply tariffs to auto imports. Although Japanese makers already have consistently moved production facilities offshore, auto exports still represent a significant part of Japan’s trade balance. The complexity of auto supply chains creates further uncertainty for Japanese automakers who are already re-evaluating their global strategy in the light of the new-found propensity of the US to tear up pre-existing trade agreements.
Away from politics, forward-looking economic indicators had been pointing towards a recovery from the short-term GDP decline seen in the first quarter. Data on the real economy released at the end of June subsequently provided some positive surprises with industrial production and inflation data for Tokyo both ahead of expectations. Although investors have apparently become rather accustomed to the strength of the labor market, a decline in the unemployment rate to 2.2% is still significant and should be viewed as positive for inflationary expectations.
With investors tending to be wary of taking additional risks during this period of uncertainty, most cyclical areas of the market, such as shipping companies and machinery producers were weaker, while there was clear outperformance from defensive sectors including foods and railways. The continued rising trend in oil prices also had a marked impact on sector performance, pushing up refiners & distributors but holding back consumers of oil such as airlines.
Asia ex Japan equities were firmly down in Q2, with global trade concerns serving to increase risk aversion. The MSCI Asia ex Japan Index generated a negative return and underperformed the MSCI World.
ASEAN markets were among the weakest index countries while Korea also fell sharply. This was despite positive developments with regards to peace on the Korean peninsula; an Inter-Korea Summit in April saw leaders from the South and North pledge to agree a formal end to the war between the two sides. US President Trump subsequently met with North Korean leader Kim Jong-un in Singapore in June. In Malaysia, the market declined after the unexpected election victory of Mahathir Mohamad’s Harapan alliance ended the ruling coalition’s 60 years in power. Taiwan also underperformed with IT sector names leading the market lower.
India, which had underperformed by a wide margin in Q1, and China finished in negative territory but held up better than the wider index. In China, the central bank cut the reserve ratio requirement for banks by a total of 1.25% over the quarter to encourage lending and support growth. However, a combination of slowing domestic growth momentum and global trade uncertainty contributed to weakness later in the quarter and the currency depreciated relative to the US dollar.
Emerging markets (EM) equities recorded a sharp fall in Q2 with US dollar strength a significant headwind. Escalation in global trade tensions also contributed to risk aversion as US-China trade talks failed to deliver a sustainable agreement. Meanwhile the US moved to extend steel and aluminium tariffs to the EU, Canada and Mexico, resulting in the announcement of retaliatory measures. The MSCI Emerging Markets Index recorded a negative return and underperformed the MSCI World.
Brazil was the weakest index market as a truck driver strike paralyzed the economy and amplified political uncertainty. Ahead of October’s presidential election, no centrist candidate saw a significant improvement in opinion poll ratings. Those markets exposed to ongoing global liquidity tightening also came under pressure, notably Turkey where currency weakness forced the central bank to implement an emergency rate hike in May. Early presidential elections, subsequently won by incumbent President Erdogan and a coalition led by his Law and Justice Party, added to uncertainty. Weak eurozone growth and uncertainty stemming from Italian politics were negative for a number of emerging European emerging markets, notably Hungary and Poland.
The emerging Asian markets of Thailand and South Korea were also firmly down and underperformed, negatively impacted by global trade uncertainty. China posted a negative return but outperformed. This was despite concerns over growth later in the period that contributed to yuan weakness. Signs of slowing momentum in the domestic economy were exacerbated by deterioration in the outlook for global trade.
Global bond markets suffered from bouts of volatility in Q2 due to a confluence of factors. These included a greater dispersion between accelerating US growth and a softening of economic activity elsewhere, escalating trade tensions between the US and China and the formation of a populist coalition government in Italy.
US 10-year Treasury yields rose from 2.74% to 2.86%. They rose significantly in April, touching a seven-year high in mid-May, as growth and inflation expectations continued to build, before risk aversion and “safe haven” buying led to a significant retracement. Bund 10-year yields fell from 0.50% to 0.30% on safe haven demand and as European data saw further softening.
The US yield curve flattened with two-year yields increasing from 2.27% to 2.53%. The spread between two and 10-year yields reached its lowest point since 2007. The Fed raised rates and kept to its hawkish tone at its June meeting.
Italian 10-year yields increased from 1.79% to 2.68% and two-year yields from -0.33% to 0.72%, as the formation of a populist coalition government in May raised concerns over Italy’s future relationship with Europe. Spain suffered some contagion effect with 10-year yields rising from 1.16% to 1.32%.
Global corporate bonds made negative total returns with US dollar investment grade (IG) and euro high yield (HY) leading the declines. US dollar HY made positive excess returns, outperforming euro and sterling counterparts, as technicals (lower supply) and fundamentals remained supportive.
Emerging market (EM) bonds had a difficult quarter, particularly local currency bonds, impacted by the strengthening US dollar, while certain EM countries saw marked currency weakening due to idiosyncratic risks.
Convertible bonds showed their protective qualities in Q2 against volatile equity markets. The overall MSCI World equity index gained 0.7% in the quarter. Convertible bonds, as measured by the Thomson Reuters Global Focus Convertible Index, returned 0.6% in US dollar terms. The primary market was very active and the new supply of interesting convertible bonds has resulted in a slight cheapening in valuations. Japanese and Asian convertibles remain undervalued.
The Bloomberg Commodities index posted a slightly positive return in Q2. Crude oil prices continued to rally, with President Trump’s decision to withdraw the US from the Iran nuclear accord contributing to higher prices, despite OPEC announcing plans to boost supply. The industrial metals index registered a small gain. Nickel (+11.9%) and aluminium (+8.4%) were firmly up while zinc (-11.5%) and iron ore (-1.7%) lost value. The agricultural component registered a sizeable decline with grains prices losing value on global trade concerns. Gold and silver fell -5.4% and -1.6% respectively.
A look back at markets in May when global equities advanced but political risks re-emerged in Europe.
June 6th, 2018
US equities advanced in May, with economic and earnings data proving resilient enough to allow investors to shrug off an escalation in trade sanction uncertainties. Late in May, the Trump administration confirmed that it would proceed with steel and aluminium trade tariffs for Canada, Mexico and the EU, and also withdrew from the Iran nuclear deal. The more combative stance stoked fears of retaliation from major trade partners and did unsettle markets. However, the positive tone set by economic data over the month allowed markets to stay ahead overall.
In April, US unemployment fell to 3.8% - its lowest level since December 2000. However, wage inflation remained muted, leaving the expected pace of Federal Reserve rate normalization unchanged. US retail sales also maintained solid growth in April after strong gains in March, suggesting the soft patch of spending data in Q1 was temporary. Industrial production has also improved notably.
The strongest sector - by some margin - was technology. Several tech majors posted double digit gains in May. The industrial sector also gained ground. The US decision to exit the Iran nuclear deal added further support for oil prices and the boosted the energy sector. Traditionally interest rate-sensitive sectors were somewhat weaker. Utilities, consumer staples and telecoms all declined.
Eurozone equities ended May in the red with the MSCI EMU index returning -1.4%. Political uncertainty in Italy dominated market moves. The populist Five Star Movement and the League appeared close to forming a government but President Sergio Mattarella blocked the appointment of a Eurosceptic finance minister proposed by the two parties. This triggered a sell-off of Italian assets by investors fearing a snap election, although the two parties rekindled coalition talks by the end of the month. Political risk also affected Spain with Prime Minister Rajoy facing a vote of no confidence on 1 June.
Against this backdrop, the financial sector led the declines, followed by telecommunication services, utilities and energy. Among financials, the Italian lenders Intesa Sanpaolo and UniCredit suffered the steepest declines while Telecom Italia was the weakest of the telcos. However, information technology and healthcare notched up good gains.
Economic data from the eurozone continued to point to steady growth, albeit at a slower pace than last year. GDP growth for the first quarter of the year was estimated at 0.4%, down from 0.7% in Q4 2017. The flash eurozone composite purchasing managers’ index for May came in at an 18-month low of 54.1 in May, compared to 55.1 in April. Eurozone annual inflation jumped up to 1.9% in May from 1.2% in April, mainly as a result of higher energy prices. The eurozone’s economic recovery continues to show up in labor market data with the unemployment rate falling to 8.5% in April compared to 9.2% in the same month last year.
The FTSE All-Share index rose 2.8% over May, enjoying a second consecutive month of strong relative performance versus global equities. UK equities continued to bounce back as international investors further reduced their underweight in the country, according to the latest issue of the Bank of America Merrill Lynch’s survey of global asset allocators. The absence of a rate hike helped support the market as it contributed to a decline in the value of sterling (against ongoing dollar strength), while merger and acquisition (M&A) activity acted as another support.
Resources sectors performed well against the backdrop of supportive Chinese economic data. In addition, crude oil prices remained firm amid geopolitical uncertainty after the US withdrew from the Iran nuclear agreement. This was offset in part by weak performance from financials and particularly the large cap banks. They performed poorly amid concerns around the wider fall-out of political uncertainty in Italy. A number of mid-cap companies became the subject of new bid interest in the month. This helped to drive the outperformance of the FTSE 250, which rose 3.1% over the period.
Sterling performed poorly after the Bank of England backed away from a much-anticipated rate rise. This was following a raft of disappointing economic data, which culminated in the bank reducing its 2018 growth forecasts. It is now expecting the UK economy to expand by 1.4% this year, versus 1.8% previously.
The recovery in stock prices seen in April continued into the first half of May but this was followed by a sharp decline which left the market 1.7% lower for the month as a whole. The yen saw a similar change in direction mid-month to end stronger against most major currencies.
The abrupt reversals for both the equity market and the currency was driven partly by political developments in Europe and partly by a switch of focus in US trade rhetoric towards automobile imports. As a result, sector leadership also changed and, although the picture for the month is not completely clear cut, defensive areas such as pharmaceuticals and railways generally outperformed for the month in total. Weaker areas included autos and auto-related companies, such as tyre producers, together with a range of industrial and financial sectors.
Although the composition of the next Italian government could have important implications within Europe, there are few direct implications as yet for Japan despite the initial reaction of the equity market. Conversely, investors seem to have come to terms quickly with the on/off status of the North Korea summit meeting with the US. The possibility of specific US tariffs being applied to auto imports could have a greater potential to disrupt Japanese companies. At this stage stock prices are simply reacting to sentiment and the exact implications are very uncertain given the complicated global supply chains in place for all the major auto assemblers.
Economic data released during May was slightly mixed, but generally supported the consensus view that the economy is returning to its previously improving trend. Housing statistics and labor market data were strong but the rebound in industrial production was less pronounced than expected.
Asia ex Japan equities finished in negative territory in May. Pakistan was the weakest index market. In ASEAN, markets were broadly weaker. Malaysia declined amid uncertainty following the unexpected election victory of Mahathir Mohamad’s Harapan alliance. Singapore, where banking stocks saw some weakness, Thailand and the Philippines also underperformed.
Korean equities fell as expectations for a resolution to tensions on the Korean peninsula diminished. Although both sides remained in dialogue, US President Trump cancelled a planned meeting with North Korean leader Kim Jong-un.
Conversely, China and Hong Kong posted positive returns and outperformed as macroeconomic data remained firm. Taiwan and Indonesia, where the central bank raised interest rates by a total of 50bps over the month, also held up better than wider index markets despite finishing in negative territory.
Emerging markets equities recorded a negative return in May, with US dollar strength a headwind amid concern over a potential de-synchronization of global growth. Political uncertainty in Italy and the risk of eurozone contagion exacerbated these concerns. The timing of a resolution to ongoing US-China trade negotiations also remained unclear. The MSCI Emerging Markets Index decreased in value and underperformed the MSCI World.
Emerging European countries were among the weakest index markets given strong eurozone trade linkages. Countries with high exposure to global liquidity tightening also fell sharply, notably Turkey. Elsewhere, Brazilian equities were heavily down as a truck driver strike paralyzed the economy and amplified political uncertainty. Mexico lagged as the prospect of an imminent resolution to NAFTA renegotiations receded and an anti-establishment candidate consolidated his lead ahead of July’s presidential election.
By contrast, China recorded a positive return as macroeconomic data remained firm. Russia was the only other index market to finish in positive territory, with oil price strength proving supportive.
Bond yields reflected increased risk aversion over the month, driven by political developments in Italy where the populist Five Star Movement and the League parties formed a coalition government. Both parties promise economic policies which would likely contravene European Union financial strictures. In a turbulent final week of May, it briefly appeared that the coalition would be blocked, raising the spectre of fresh elections, but it was then confirmed by month-end.
Italian 10-year yields increased from 1.79% to 2.79%, with two-year yields rising from -0.30% to 1.07%. Spanish 10-years also lurched higher from 1.28% to 1.50%. Spain too experienced political turmoil. The opposition party filed a no-confidence motion against Prime Minister Rajoy, after it emerged his party had been taking illegal payments, and he left office on 1 June.
US 10-year Treasury yields dropped from 2.95% to 2.86%. They rose at first, briefly reaching a seven-year high, but declined in the second half of the month as investors sought safe havens. UK and core European yields moved significantly lower. Gilt 10-year yields declined from 1.42% to 1.23%, while Bund 10-year yields were down from 0.56% to 0.34% and French 10-year yields dropped from 0.79% to 0.67%.
Corporate bonds lagged government bonds. European corporates were weak given the renewed risk in the region, with banking and insurance issuers particularly affected, especially in high yield. US dollar investment grade saw positive total returns. Emerging market (EM) bonds declined further, especially local currency, as the US dollar rallied and some countries saw sharp currency weakness.
Turning to convertibles, regional stock markets painted a very mixed picture in May. Convertible bonds as measured by the Thomson Reuters Global Focus Convertible Index returned 0.4% in US dollar terms. European convertibles came down in value, but US convertible bond gained and are now trading significantly above their fair value. Asian and Japanese convertibles remain fairly priced to borderline cheap.
The Bloomberg Commodities index recorded a positive return in May. The energy component registered the strongest return. Brent crude rallied as President Trump announced the withdrawal of the US from the Iran nuclear agreement. Natural gas (+6.8%) and thermal coal (+10.8%) also made solid gains. In the industrial metals segment, nickel (+11.5%) was the standout metal as supply tightened. Copper (+1.1%) and aluminium (+1.5%) also finished in positive territory. In precious metals, gold was down 1.4% while silver returned +0.6%.
A look back on what happened to equities and bonds in April, as the oil price rallied.
May 5th, 2018
US equities advanced in April but underperformed the MSCI World index. The continued strength in US macroeconomic data and cooling trade fears restored calm, while the oil price rallied strongly on robust demand and rising Middle East tensions. This combination of factors restored momentum to more cyclical sectors, although meaningful stock-specific developments also impacted market movements.
US GDP growth in Q1 was confirmed at 2.3%, which was slower than growth in Q4 but ahead of expectations. Inflation – both with and without fuel costs - was also confirmed as higher in March and close to the target range. The March unemployment rate was steady at 4.1% but is still expected by the Federal Reserve (Fed) to drop below 4% by the end of the year. These factors, in addition to the sharp oil price rise, led to renewed speculation over the pace of Fed rate hikes this year.
Perhaps unsurprisingly, the strongest sector for April overall was energy. A number of stocks in the sector posted double-digit returns over the month. Consumer discretionary stocks were also higher after robust results from major online consumer firms, Netflix and Amazon. Industrials – particularly airlines – were hindered by the oil price rally due to concerns over fuel price pressures. Consumer staples also lagged, due in part to perceived “bond proxy” status, but also due to a guarded update from Philip Morris, who warned that adoption of its “reduced risk” products such as heated tobacco was proceeding more slowly than anticipated.
Eurozone equities bounced back in April with the MSCI EMU index returning 4.5%. Gains were led by the energy sector amid rising oil prices and some well-received Q1 results from the big oil firms. The telecommunication services sector also performed strongly, supported by merger & acquisition activity. This included US firms T-Mobile (owned by Deutsche Telekom) and Sprint confirming a long-awaited merger. The consumer discretionary sector registered robust gains while consumer staples was the main laggard but still delivered a positive return.
The flash eurozone purchasing managers’ index for April was unchanged from 55.2 in March, indicating that business activity continues to rise at a solid pace. However, the German Ifo business climate index fell to 102.1 in April from 103.3 in March, demonstrating weaker sentiment among German businesses. For Q1, French GDP slowed down, growing by 0.3% compared to 0.7% in Q4 2017. Meanwhile, Spanish growth was steady at 0.7% for a third consecutive quarter.
The European Central Bank (ECB) kept monetary policy unchanged, as expected. In his statement, ECB president Mario Draghi highlighted still-subdued inflation and the recent moderation in economic data. On the political front, Italy moved no closer to forming a government despite President Mattarella mediating talks between the main parties.
The FTSE All-Share index rose 6.4% over the month, outperforming most other markets. UK equities bounced back following a very poor performance in the first quarter of 2018 when the UK’s unpopularity with global asset allocators had weighed heavily on returns. Merger and acquisition (M&A) activity remained an important theme and the market was further supported by renewed weakness in sterling against a resurgent US dollar.
The oil & gas sector performed very well over the month in line with higher crude oil prices, which continued to climb in response to robust global demand and ongoing supply discipline. A number of domestically-focused areas of the market also outperformed due to M&A activity. J Sainsbury proposed a merger with Asda, Whitbread announced plans to demerge its Costa coffee brand, and bus and rail operator FirstGroup received a highly conditional proposal from private equity group Apollo Management regarding a possible cash offer.
Sterling weakened against the backdrop of some disappointing macroeconomic data. GDP figures for Q1 2018 show the UK economy grew just 0.1% compared to the final quarter of 2017. This represents the slowest quarterly growth rate since Q4 2012. The recent wintry weather was partly to blame; however, the Office for National Statistics, who produces the data, said that overall the effects of the snow were “generally small’. The disappointing data pushed back near-term expectations for a rise in base rates.
After some initial weakness, the Japanese equity market rose steadily to close the month 3.6% higher. The yen was generally weaker, reversing most of the move seen against the US dollar in the previous two months. Stocks were weak in the first few days of April as trade friction between the US and China continued to escalate. As a result, defensive sectors initially outperformed. Sentiment improved as expectations rose that some negotiated compromise would replace the prospect of a full trade war. The summit between Prime Minister Abe and President Trump also passed without drama. Commodity-related and financial stocks subsequently led the market higher. However, the combination of these two phases produced a rather mixed picture for sector performance over the month as a whole.
The rapid apparent de-escalation of North Korea tension, culminating in the inter-Korean summit, further reduced the influence of geopolitics and prompted some yen weakness. This, in turn, encouraged foreigners to return as net buyers of Japanese equities in the latter part of the month after heavy net selling seen for the previous 12 consecutive weeks.
Prime Minister Abe continued to be dogged by the domestic financial scandal over the Moritomo Gakuen land sale, with public prosecutors starting to question Finance Ministry officials over falsification of documents related to the controversy. Economic data supported the consensus view that any short-term softness in the economy seen in February and March should prove to be temporary, rather than signaling a reversal of the improving trends seen throughout 2017.
The MSCI Asia ex Japan index recorded a positive return in April. An apparent easing in global trade concerns proved supportive. China responded to the US Section 301 tariffs (announced in March) with retaliatory measures. However, speeches from President Xi and central bank governor Yi Gang at the Boao Forum were perceived as conciliatory as opposed to confrontational. Their remarks included the announcement of measures to accelerate the opening up of Chinese markets to foreign companies, notably the car industry.
Singapore was the best-performing market while Hong Kong also outperformed. Both markets were led higher by financials. India finished ahead of the index, as the market recovered somewhat following recent weakness. Korean equities also moved higher. At an inter-Korean summit, the North and South Korean leaders pledged to agree a formal end to the war on the peninsula.
In contrast, Indonesia, which is sensitive to global liquidity tightening, and Taiwan underperformed. In Taiwan semiconductor stocks led the market lower amid concern over slowing global smartphone sales. China posted slightly positive returns but lagged the index, attributable in part to weakness from internet and e-commerce stocks.
Emerging markets equities posted a slightly negative return in April, with US dollar strength a headwind. The MSCI Emerging Markets index decreased in value and underperformed the MSCI World.
Those markets most sensitive to global liquidity tightening lost value. These included Turkey, Indonesia and South Africa. In Turkey, the announcement of early parliamentary and presidential elections, to be held in June, also increased uncertainty. Russia recorded a negative return and underperformed with ruble weakness amplifying weak equity returns. Russian asset markets were negatively impacted by the announcement of new US sanctions against a number of oligarchs and their companies.
In contrast, Greek equities rallied sharply, led higher by banking stocks. Colombia posted a positive return, with oil price strength proving supportive. Indian equities outperformed following recent weakness. Korea also finished ahead of the index, as North and South Korean leaders pledged to agree a formal end to the war on the peninsula.
US Treasury yields resumed an upwards path in April amid a continued hawkish tone from the Fed and higher inflation data. US government 10-year yields rose from 2.74% to 2.95% and two-years from 2.27% to 2.49%. The increase was slightly smaller at the longer-end of the curve.
Yield moves were less significant elsewhere. UK gilts rose initially, but reversed course mid-month ahead of GDP data, which in the event disappointed. Ten-year yields were up from 1.35% to 1.42%, while five and two-year yields were unchanged.
In Europe, Bund yields edged higher. Ten-year Bund yields were up from 0.50% to 0.56%, while French yields rose from 0.72% to 0.79%. Having performed well the previous month, Italian 10-year yields were unchanged at 1.79% and Spanish yields rose from 1.16% to 1.28%. European economic data was again slightly softer.
A steadier backdrop for risk assets aided corporate bonds. The ICE BofA Merrill Lynch Global Corporate Index returned -0.5% (in local currency) and outperformed government bonds. The negative total return largely reflected the -0.8% total return on US dollar investment grade credit. The global high yield (HY) index returned 0.4% in local currency, led by sterling HY (total return +0.8%).
Emerging market (EM) bonds saw negative total returns. Local currency EM sovereign bonds returned -3.0%, having had a strong run, as the US dollar rallied.
Turning to convertibles, the Thomson Reuters convertible bond index returned 0.5% in US dollar terms - approximately half of the upward move of global equities. Intraday stock volatility remained elevated and implied volatility of convertible bonds moved up to 29%. European convertibles remain high in value compared to their fair value, but US convertibles cheapened further.
The Bloomberg Commodities index registered a positive return in April. The energy component posted the strongest gain as geopolitical concerns, notably uncertainty as to whether President Trump will withdraw from the Iran nuclear deal, and falling output in Venezuela contributed to an 8.3% rally in Brent crude. The industrial metals sub-index also moved higher. Copper (+1.4%), iron ore (+3.6%) and nickel (+2.6%) all increased in value. Meanwhile, aluminium rallied 13.6% as US sanctions led to supply concerns. The agricultural component recorded a more modest return, supported by a sharp rise in wheat prices, amid adverse weather concerns. Precious metals were slightly weaker with gold down -0.6% and silver losing -0.3%.
An overview of markets in Q1 2018 when worries over US interest rates and trade weighed on global equities.
April 6th, 2018
Please note any past performance mentioned in this document is not a guide to future performance and may not be repeated.
US equities began 2018 strongly, buoyed by ongoing strength in economic data, robust earnings and the confirmation of a major tax reform package. Indeed, macroeconomic prints remained broadly positive throughout Q1. US business confidence reached an unexpected, multi-decade high in March. GDP for Q4 2017 was revised upwards to show growth of 2.9%, and while industrial activity slowed – as measured by the ISM manufacturing index – it continued to indicate expansion.
However, the latter part of the quarter saw a marked increase in volatility. Investors first digested the destabilizing potential of an elevated US inflation reading and the possibility that the Federal Reserve (Fed) may need to become more proactive in raising interest rates in order to keep upward price pressures under control. The Fed did indeed raise rates by 25 basis points (bps) in March, to a range of 1.5% to 1.75%. It did not, however, alter its overall rate projection of three hikes for 2018. The announcement quelled some concerns, but escalating US-China trade sanctions precipitated a renewed bout of turbulence in March.
Overall, the S&P 500 declined in the period. Cyclical sectors performed more strongly in January and February, when the market was focused on faster rate hikes. In March, the broader decline in risk appetites saw more defensive areas outperform. Over the quarter, the weakest performance was in telecoms and consumer staples, although most sectors fell. Technology and consumer discretionary stocks were the only positive sectors over the quarter.
Eurozone equities delivered negative returns in the first quarter, with the bulk of the declines coming in March. The region’s stock markets began the year on a firmer footing but worries about the path of US interest rates and the outlook for global trade led to declines for the period overall. The worst performers in terms of sectors were healthcare and telecommunication services. These sectors are typically thought of as “bond proxies” offering stable returns and are much sought after when bond yields are low. However, amid expectations of rising US rates, and therefore rising bond yields, such sectors fell out of favor in the quarter. Energy was the only sector posting a positive return while information technology and consumer discretionary saw only modest declines.
The economic backdrop in the eurozone remained encouraging over the three months. GDP growth for Q4 2017 was confirmed at 0.6% quarter-on-quarter. Unemployment was stable at 8.6% in January 2018. However, forward-looking surveys painted a picture of slower future growth. The composite purchasing managers’ index (PMI) hit a 14-month low in March, albeit the reading of 55.3 still implies solid growth. Annual inflation was 1.1% in February, below the European Central Bank’s (ECB) target. ECB chairman Mario Draghi reiterated that interest rates would not rise until well past the end of the quantitative easing program.
On the political front, the key event of the quarter was Italy’s election, which yielded no overall winner. The anti-establishment Five Star Movement emerged as the largest single party. President Mattarella will now mediate talks to form a new government. Germany formed a new government after its inconclusive elections in September 2017. Angela Merkel remains as chancellor after her centre-right CDU/CSU agreed another grand coalition with the centre-left SPD.
The FTSE All-Share fell 6.9% over the period under review. UK equities performed poorly as gilt yields rose in line with a broad-based sell-off in global bonds. Bond market yields rose amid signs that the world economy is moving from the recovery to expansion phase of the economic cycle, with a consequent increase in inflationary pressures and tighter monetary policy.
As bond yields rose there was a rotation away from more stable and defensive areas of the market, a trend which was exacerbated by sterling strength. Sterling was supported by expectations that the Bank of England could increase base rates faster than previously anticipated, albeit the currency’s relative strength was partly a function of weakness in the US dollar.
Sentiment towards UK equities struck new lows in the period as overseas buyers continued to shun the market amid ongoing political uncertainty and a weak outlook for economic growth. Despite this, the trend for inbound merger and acquisition activity remained in train with a number of UK quoted companies becoming the subject of bids from overseas trade buyers.
While UK economic growth remained sluggish it continued to surpass low expectations. In its February inflation report the Bank of England nudged up its growth forecast for 2018, from 1.7% to 1.8%. There was further progress with Brexit negotiations over the period with an initial agreement struck on the terms of a transition period for after the UK formally exits the EU.
After a strong start to the year, Japanese equities followed a similar pattern to other global markets and ended the quarter 4.7% lower. The heightened uncertainty resulted in a generally stronger yen against major currencies. Corporate results covering the period to December 2017 showed very positive trends. However, there was little scope for differential stock performance within sectors as investor sentiment was dominated by political events both domestically and globally.
The most pervasive influence came from the switch in US policy towards increased protectionism. The initial moves are likely to have little impact on the fundamental outlook for Japanese companies, although the level of the yen remains an important transmission mechanism for stock market sentiment. Investors were also taken by surprise by an abrupt change in apparent stance of all players engaged in discussions on North Korea’s nuclear ambitions. Although the ultimate outcome remains opaque at best, investors should welcome any reduction in regional tension.
Domestically, new twists in the controversy surrounding the Moritomo Gakuen land sale have seriously dented Prime Minister Abe’s approval rating. Meanwhile, the decision by the ruling Liberal Democratic Party to recommend the reappointment of Mr Kuroda for a second term as Governor of the Bank of Japan has eliminated one area of potential uncertainty and should ensure a stable policy environment.
The Japanese economy experienced a slightly soft patch for economic growth in Q1 2018 with many indicators of production and consumption slipping slightly. However, the longer-term trend of economic improvement appears intact. The rapid spikes up in market volatility seen in February and March - coupled with a focus on potential trade disruption - led to stark divergence in sector returns. Any sectors which could be considered as trade-related, together with all cyclical areas, declined most, while relatively defensive sectors such as pharmaceuticals and utilities outperformed significantly.
Asia ex Japan equities saw a rise in volatility linked to global trade concerns in Q1, but finished in positive territory. The MSCI Asia ex Japan Index generated a positive return and outperformed the MSCI World.
Thailand was among the best-performing markets, supported by strong performance from energy and utilities stocks. Taiwan, where technology stocks led the market higher, and Malaysia also recorded strong returns. Chinese equities generated solid gains and finished ahead of the index as macroeconomic data was more resilient than expected; GDP growth for 2017 accelerated to 6.9% year-on-year and higher frequency data was relatively firm.
In contrast, the Philippines and Indonesia posted sharp falls. In the Philippines, currency weakness was a headwind amid rising inflation and as the current account moved into deficit. In Indonesia, signs of deterioration in policy and ongoing subdued growth weighed on sentiment. India also lagged, owing to concerns over a reported fraud at a state bank and weak performance from the ruling Bharatiya Janata Party in state by-elections. The market also faced headwinds from higher oil prices and global interest rate tightening.
Emerging markets equities registered a positive return in the first quarter, despite a rise in market volatility stemming from tensions over global trade. The MSCI Emerging Markets Index recorded a positive return and outperformed the MSCI World.
Brazil generated the strongest return as former president Luiz Inácio Lula da Silva saw his criminal conviction upheld, increasing the chances that the left-wing candidate is prohibited from participating in October’s presidential elections. Despite falling back later in the quarter, Russia recorded a strong gain as the central bank cut interest rates and the country’s debt was upgraded to investment grade by ratings agency S&P. Although Chinese equities were volatile towards the end of the quarter, given rising trade tensions with the US, the market recorded a positive return and outperformed. Macroeconomic data remained broadly stable, albeit there were ongoing signs of a gradual slowing in momentum, with official PMI easing to 50.3.
In contrast, Indian equities lost value, in part due to concern over a reported fraud at a state-owned bank. Weak performance from the ruling BJP in two state by-elections in March also weighed on sentiment. Emerging European markets were also weaker, notably Poland where state-controlled enterprises led the market lower.
US Treasury yields rose markedly across the curve over the quarter as expectations of growth, inflation and interest rates shifted higher. Volatility returned to markets, picking up sharply from low levels and impacting risk assets. In March, sentiment was negatively impacted by rising trade tensions between the US and China.
The US yield curve continued to flatten modestly with shorter-dated maturities impacted by a rate hike and substantial issuance in March. Ten-year yields increased from 2.41% to 2.74%, reaching a high of 2.95% in February, five-years from 2.21% to 2.56% and two-year yields from 1.88% to 2.27%.
UK gilts saw more pronounced curve flattening as 10-year yields rose from 1.19% to 1.35%, while five and two-year yields rose by 39 and 38 basis points (bps).
Bund yields rose slightly, 10-year yields increasing from 0.43% to 0.50%, five-year yields from -0.20% to -0.10% and two-year yields edging up from -0.63% to -0.60%. French 10-years were modestly lower. Italian and Spanish 10-year yields fell, with Spain’s down from 1.57% to 1.16% as it drew strong demand for a series of new issues. Italian 10-year yields were down from 2.02% to 1.79%. The Italian election resulted in the undesirable outcome of a hung parliament, given the need for reform.
Corporate bonds made negative total returns and underperformed government bonds. Investment grade (IG) credit saw larger negative returns than high yield (HY), notably in US dollar, while sterling HY performed well. In emerging markets, local currency sovereign bonds made strong total returns as the US dollar declined, but hard currency sovereign and corporate bonds saw negative total returns.
Stock markets suffered a setback in the first quarter of 2018. Global equity markets shed just under 9% from peak to trough, giving up some of the fast-earned gains from the recent rally. Convertible bonds offered good protection with the maximum drawdown for the global index at only -2.6%. Over the full quarter convertibles, as measured by the Thomson Reuters Global Focus Convertible Index, delivered a positive return of 0.3% in US dollar terms against falling equity markets.
The Bloomberg Commodities index posted a modest negative return in Q1. This was attributable to weakness from industrial metals amid rising global trade tensions and concern that further escalation could impact demand. Copper was particularly weak, down 8.3%. Conversely, the energy and agricultural components recorded solid gains. In agriculture, corn (+10.6%) and soy bean (+9.8%) prices were notably strong. In the energy segment, Brent crude (+5.1%) rallied into quarter-end amid rising confidence that Opec would maintain its production cuts through the full year 2018. In precious metals, gold (+1%) posted a positive return but silver (-5.1%) lost value.
A look back at markets in February 2018 when global equity markets retreated as volatility returned.
March 6th, 2018
US equities declined sharply in early February. The correction was precipitated by an uptick in US wage inflation data that prompted investors to reappraise the Federal Reserve’s (Fed) likely pace of policy tightening. The market weakness was exacerbated by a rise in the VIX (volatility) index, which forced leveraged short volatility strategies to close their positions. Confirmation that macroeconomic data remained broadly resilient did, however, allow markets to recover some poise by month-end.
US retail spending did fall in January but in the context of a very strong Q4 for consumer activity. Furthermore, consumer confidence remains near historic highs. The University of Michigan Consumer Sentiment index posted its second highest reading since 2004 in February, despite the market volatility. US unemployment remains low and business activity indicators are robust. Consumer price inflation was also higher than expected in January.
Accordingly, more cyclical sectors – financials and consumer discretionary names - were more resilient over the month. Technology stocks were also amongst the best performing names. Energy names were materially weaker on supply pressures. Consumer staples, telecoms and real estate were among the weaker market sectors.
Eurozone equities ended February in the red, returning -3.8% over the month. The sell-off that began in late January continued into February, although the low point of the month was reached on 9 February with markets recovering thereafter. That sell-off was largely prompted by expectations of rising inflation and interest rates, primarily in the US.
Sectors that are perceived as “bond proxies” (those with predictable returns) saw the biggest declines over the month, particularly healthcare. The best performing sectors were energy and information technology but all sectors declined. Nonetheless, the earnings season continued positively with many companies beating consensus expectations and issuing confident outlooks for the coming year.
Eurozone inflation moderated to 1.2% in February from 1.3% in January. The eurozone composite purchasing managers’ index (PMI) dipped to 57.5 in February, retreating from the near 12-year high reached in January. GDP growth was confirmed at 0.6% quarter-on-quarter in Q4 2017. The European Commission revised up its economic growth forecasts, now expecting GDP growth of 2.3% in 2018 and 2.0% in 2019.
UK equities took their lead from the US, failing to fully recover from a sharp sell-off at the beginning of the month following the abrupt return of equity market volatility.
Bond proxies performed poorly amid rising expectations that central banks – including the Bank of England (BoE) – will continue to tighten monetary policy. Resources sectors also performed poorly against the backdrop of weaker crude oil and industrial metal prices.
Expectations for a further tightening in monetary policy rose as evidence continued to build for a sustained recovery in the global economy. In its latest quarterly inflation report the BoE nudged up its forecast for UK GDP growth in 2018 from 1.7% to 1.8%, against the backdrop of stronger growth in the rest of the world. Comments from the BoE and its governor Mark Carney indicated that UK interest rates are likely to go up sooner and faster than previously expected.
Mid cap equities outperformed large caps with the FTSE 250 ex Investment Trusts index falling 2.8% over the month versus a 3.4% retreat in the FTSE 100. UK small caps lagged, with the FTSE Small Cap ex Investment Trusts index 3.9% lower.
In common with other major markets, Japanese equities suffered a sharp setback in early February before rebounding slightly to end the month with a total return of -3.7%. The Japanese yen strengthened during the month, especially against sterling.
The rapid spike up in market volatility led to outperformance of some typically defensive areas such as pharmaceuticals and telecommunications although food stocks underperformed. Cyclical sectors were generally weaker than the market, with marine transport and rubber products showing the sharpest declines. Despite some dramatic market moves there was very little new information for equity investors. The quarterly results season for Japanese companies closed with strong aggregate numbers and the positive revision cycle continued.
Investors should also have welcomed the decision by the ruling Liberal Democratic Party to recommend the reappointment of Mr Kuroda for a second term as governor of the Bank of Japan. This has eliminated one area of potential uncertainty and should ensure a stable policy environment.
Economic data released in late February were generally weaker than those seen in recent months, but seem to be influenced by a number of one-off factors. The sharp downturn in industrial production on a year-on-year basis probably stemmed from differences in the timing of Chinese New Year, while domestic consumption numbers suffered as a result of poor weather. The initial release of quarterly GDP was also below expectations, but several components may be revised in the light of subsequent data releases.
Asia ex Japan equities lost value amid increased volatility in February. The MSCI Asia ex Japan index fell 5.0% and underperformed the MSCI World.
India was the weakest index country with banking stocks leading the market lower. An alleged fraud at state-controlled Punjab National Bank raised concern over the wider sector. Chinese equities were also down, with real estate and financials stocks among the weakest index names. Despite this, macroeconomic data released during the month was broadly stable. Korean equities also underperformed, in part due to weak Q4 earnings results.
The Taiwanese and Hong Kong markets held up better than the wider index but finished in negative territory. Thailand was the only index country to record a positive return with utilities and energy stocks proving supportive.
Emerging market equities were not immune from the wider market volatility and recorded a negative return with US dollar strength a headwind. The MSCI Emerging Markets index decreased in value and modestly underperformed the MSCI World.
The emerging European markets of Poland and Hungary were among the weakest index countries with currency weakness amplifying negative returns. Indian equities were also firmly lower amid concern that an alleged fraud at a state-owned bank could have negative implications for the wider banking sector.
Chinese equities also experienced a pullback over the month. However, economic indicators were broadly stable with the Caixin manufacturing PMI unchanged at 51.5 in January while industrial production growth ticked up to 6.2% year-on-year (YoY) in December.
In contrast, Russia posted a small gain and outperformed. Industrial production growth increased to 2.9% YoY in January, recovering from weakness in late 2017. Meanwhile, inflation fell to 2.2% YoY and the central bank lowered its key interest rate by 25 basis points to 7.5%, in line with expectations.
US Treasury yields continued to rise at a robust pace as strong jobs data gave further fuel to growth and inflation expectations. Treasuries were impacted by the volatility spike early in the month, with yields oscillating significantly over the first few days. They rose steadily thereafter, reaching an intra-month high of 2.95%. For the month overall, 10-year yields increased from 2.70% to 2.86%, with similar rises in five and two-year yields.
European yields moved sideways, following January’s upward move, with Bund 10-years down slightly from 0.70% to 0.66% and French 10-years from 0.97% to 0.92%. Italian 10-year yields were lower from 2.02% to 1.97%, while Spain’s ticked up from 1.43% to 1.46% having fallen in January. UK 10-year gilt yields were marginally lower at 1.50%. Spain issued a 30-year bond for the first time in two years, the latest in a string of new issues from peripheral European countries. The issue raised €6 billion though demand significantly exceeded this.
The final days of the month saw new Federal Reserve Chair Jay Powell address congress for the first time. Powell’s testimony was taken as marginally more bullish on the economy and as such more hawkish on the outlook for interest rates. The market moved to price a moderately faster pace of rate hikes in 2018.
Corporate bonds made negative total returns and underperformed government bonds with a slightly larger decline in investment grade (IG) than high yield (HY). Euro credit IG proved most resilient, while US dollar and sterling IG saw significant falls. Sterling HY performed relatively well. Energy underperformed, across IG and HY, as the oil price was impacted by the decline in risk assets. Emerging market bonds too declined, with hard currency sovereign debt down 2%, local currency and corporates down 1%.
Turning to convertibles, global equity markets shed about 9% from peak to trough, giving up some of the fast-earned gains from the recent rally. Convertible bonds offered protection with the maximum drawdown for the global index at only -3.9%. For the month as a whole, convertible bonds as measured by the Thomson Reuters Global Focus Convertible index, returned -0.9% in US dollar terms. Implied volatility, a good measure of convertible valuations, remained around 29%. Some of the European convertible names richened slightly in the market rebound towards the end of the month, but on balance valuations remained stable.
The Bloomberg Commodities index posted a negative return in February. The energy component recorded the steepest decline as natural gas (-11%) and Brent crude (-6.4%) both lost values. US dollar strength and rising oil production weighed on spot prices. The firmer US dollar was similarly negative for industrial metals with copper (-2.6%), zinc (-3.3%) and lead (-4.8%) all losing value. Precious metals were weaker too, with gold down -1.5% and silver -4.5%. In contrast, the agriculture component registered a positive return, with wheat in particular performing well.
We Are Pleased To Announce That The Cronos Group Are To Begin Trading On The Nasdaq Stock Exchange
February 12th, 2018
TFR Global is pleased to announce that after successfully assisting the Cronos Group with their initial private placement funding program the company will now also start the trading of its common shares in the United States.
Alongside the NASDAQ listing the Cronos Group will also be retaining its listing on the TSX Venture Exchange ("TSX-V") under the symbol "MJN."
Cronos Group expects that its common shares will begin trading on Nasdaq on February 27th, 2018 under the trading ticker symbol "CRON."
Their success story so far has enabled the company shares and listing to be elevated from the Nasdaq International Designation program to the Nasdaq Global Market ("Nasdaq").
"This up listing to NASDAQ is a major corporate milestone and reflects the significant progress we have made in strengthening our corporate governance and expanding our global footprint," said Mike Gorenstein, CEO of Cronos Group.
"We believe this will increase long term shareholder value by improving awareness, liquidity, and appeal to institutional investors," Gorenstein added.
Cronos Group Inc., which already trades in Canada, will be the first marijuana company on a major U.S. exchange -- right alongside Nasdaq stocks such as Apple Inc., Microsoft Corp. and Starbucks Corp.
The listing will now increase investor appetite to the so-called ‘Green Rush’ with U.S. investors, who were previously uncomfortable or restricted from putting funds abroad or into over-the-counter stocks, now have a mainstream option that has passed muster with the Securities and Exchange Commission.
Dennis Tillman, Founder and Chairman of TFR Global said, “We are delighted to see the progress made by the Cronos Group and are privileged to have been involved with their success story to date.”
“The legal marijuana sector is offering investors enormous returns’ potential and as a company we will always ensure we expose our client base to such markets opportunities. Our skilled and seasoned team of analysts and advisors are always willing to share advice with any investor as to these opportunities and we welcome them to contact us to discuss any such market sector opportunities that we have available for them to explore,” Tillman added.
We believe that careful and well thought out planning and advice go together for all investment types. Our advisors work daily with different kinds of investors in different stages of life. So, no matter what your position is in life right now, we can help you get to where you want to go. Our investment options are personalized to meet your expectations and your life goals.
A look back at markets in Q4 2017 when global equities ended a strong year on a high note.
January 5th, 2018
In the US, the S&P 500 ended a strong year with a fourth-quarter gain of +6.6%. Two Republican defeats in Senate contests in Alabama and Virginia during the quarter spurred House and Senate Republicans into action. Fearing the defeats are a sign of things to come in next year’s mid-term elections, they agreed the long-awaited tax reform bill. Markets rallied on the news, with big permanent cuts for corporations as the centerpiece of the package.
US equities were also supported by generally positive macroeconomic data, including better-than-expected third-quarter GDP growth of 3.0% (annualized). Employment data over the period was partly distorted by the effects of the hurricane season. However, non-farm payrolls rose by a stronger-than-expected 228,000 in November although wage growth remained subdued.
As had been widely anticipated, the US Federal Reserve (Fed) lifted interest rates by 25 basis points (bps) in December. The Fed also raised its growth forecasts for 2018 to 2.5% from 2.1%.
The quarter also saw robust corporate earnings, particularly from the technology sector. Cyclical areas of the market performed well, with gains led by the consumer discretionary sector, technology and financials. The utilities sector underperformed.
Eurozone markets ended 2017 on a negative note with the MSCI EMU index returning -0.5% in the fourth quarter. Profit-taking after this year’s gains and a stronger euro were in part to blame for the downward move. The healthcare, telecoms and financials sectors underperformed, while materials were the top gainer. Within healthcare, some corporate updates disappointed the market, including below-consensus Q3 revenues from pharmaceutical firm Sanofi.
Data showed the eurozone’s economy recovery continuing. The region’s GDP grew by 0.6% in the third quarter, albeit a slight slowdown from 0.7% in Q2. Meanwhile, inflation was 1.5% in November 2017, up from 0.6% in the same month in 2016. The unemployment rate fell to 8.8% in October, the lowest rate since January 2009. In October, the European Central Bank announced that quantitative easing would be extended to September 2018 but that the pace of purchases would be reduced from €60 billion per month currently to €30 billion.
Political events returned to the fore in the quarter. In Germany, coalition talks collapsed between Angela Merkel’s CDU/CSU and the liberal FDP and the Greens. However, the center-left SPD agreed to talks with the CDU in an effort to resolve the impasse. Catalonia held a regional election which failed to resolve the independence issue. Separatist parties retained a slim majority overall but Ciudadanos, who favor the union with Spain, emerged as the largest single party.
The FTSE All-Share index rose 5.0% over the period amid further evidence of a sustained recovery in the global economy. This was underlined as the International Monetary Fund (IMF) upgraded its global growth forecast for 2017 to 3.6%, from 3.2% reflecting rising hopes for a sustained synchronized recovery.
Industrial metal prices rallied against the generally favorable backdrop for global and Chinese demand in particular. Chinese supply-side measures were also a factor as the authorities cut back on inefficient and polluting capacity. Mining companies performed very well as a result.
The oil and gas sector also outperformed over the period as crude oil prices were supported after OPEC-led production cuts were extended until the end of 2018. In addition, the oil majors delivered strong third-quarter results, underpinned by ongoing cost and capital expenditure discipline. This added to market confidence that their dividends will be covered by cashflows, even at spot crude oil prices significantly lower than the current level.
On the domestic front, despite a sluggish economy, the Bank of England’s (BoE) monetary policy committee raised interest rates for the first time since November 2007, from a record low of 0.25% back to 0.50%. Annual consumer price index inflation reached 3.1% in November, breaching the BoE’s upper target. The UK Budget did little to dispel the fears around the UK economy as the Office for Budget Responsibility downgraded its GDP growth forecasts.
However, hopes rose towards the period end around progress with Brexit negotiations, with an agreement struck to allow talks to proceed to the future of trade arrangements.
Japanese equities gained ground to record a rise of 8.7% for the quarter while the yen ended little changed. After considerable initial uncertainty over the potential outcome of October’s snap general election, the likelihood of an LDP victory increased steadily. This enabled equity investors to form a view on the likely continuation of both monetary and fiscal policies. This more stable sentiment was matched by a significant pick-up in net purchases of Japanese equities by foreign investors, helping to maintain upward momentum in the market after Mr. Abe’s victory was confirmed.
The latest quarterly corporate results season continued the strong trends seen in the previous three months. The majority of companies again exceeded expectations and the positive cycle in earnings revisions was maintained. Individual share prices reacted positively to any evidence of improved pricing power as Japan exits a long period of deflation.
After some slightly disappointing economic numbers seen in November, virtually all the data released in December exceeded expectations. The unemployment rate declined to 2.7%, a new low for this cycle, while the number of people employed extended the rising trend seen throughout 2017. Inflation data also unexpectedly improved and industrial production and retail sales were comfortably ahead of forecast. Meanwhile, the Bank of Japan’s quarterly Tankan survey recorded the strongest sentiment among large manufacturing companies for more than 11 years.
The improved economic prospects and strong corporate results tended to favor more cyclical areas of the market, including paper stocks, machinery and trading companies. Conversely, traditionally defensive areas such as pharmaceuticals, telecoms and utilities all lagged the rising market.
The MSCI Asia ex Japan index was up 8.2% in Q4. India and Korea generated the strongest gains. India outperformed as the government announced plans for a significant recapitalization for state-controlled banks. Korea benefited from China’s effort to reset relations, which had deteriorated after South Korea proceeded with THAAD missile deployment.
Hong Kong and China recorded strong gains but finished slightly behind the index. In China, Q3 GDP growth was stable at 6.8% albeit higher frequency data reflected a moderate deterioration in activity. The 19th Communist Party Congress was held during October and emphasized a focus on the quality of growth and addressing structural risk. Following the Fed’s December hike, the People’s Bank of China (PBoC) did hike some rates by 5 bps. The PBoC also preannounced a targeted cut to the required reserve ratio, to take effect in January 2018.
Elsewhere, Thai stocks outperformed, supported by upbeat GDP numbers. Indonesian stocks performed in-line with the broader market. Taiwan stocks underperformed amid volatility in technology stocks during the quarter.
Emerging markets recorded a strong gain in Q4, with political developments supporting gains. The MSCI Emerging Markets index increased in value and outperformed the MSCI World.
South Africa was the strongest index market as pro-reform candidate, Cyril Ramaphosa, was elected as leader of the African National Congress. This development increased the prospect for a return to more orthodox policy after elections in 2019. Greek equities rallied as the country reached agreement with international creditors over reforms, paving the way for the dispersal of further bailout funds. India also outperformed as the government announced plans for a major recapitalization for state-controlled banks. Meanwhile, South Korea benefited from China’s effort to reset relations, which had deteriorated after South Korea proceeded with full THAAD missile deployment.
In contrast, Mexico posted a negative return and was the weakest index country. This was largely attributable to peso weakness, amid concern that negotiations to modernize Nafta may collapse. Brazil also posted a negative return as a result of currency weakness. Congress voted not to send corruption allegations against President Temer to the Supreme Court in October. However, the president received slightly less support than in a previous vote, raising concern that his political capital may be waning. This has led to concern over the government’s ability to pass reforms required to control public debt.
US Treasury yields rose over the quarter, and the yield curve flattened, amid growing momentum behind a tax reform bill which is expected to stimulate growth and inflation. December saw yield volatility around this as doubts led to yields initially dropping to 2.34% before reversing to 2.50% in the run-up to the bill being approved by the Senate. For the quarter overall, 10-year yields increased from 2.33% to 2.41%, five-year yields rose from 1.93% to 2.21% and two-year yields from 1.48% to 1.89%.
In Europe, positive economic momentum continued unabated, with manufacturing activity at multi-year highs. The ECB announced the reduction of asset purchases, but extended the program, which proved a significant boost to bond yields. Government yields in Spain, Italy and France performed well on the announcement, but the moves were either reduced or undone later on due to political factors. In Catalonia, a snap parliamentary election, called following the referendum vote for independence, saw pro-independence parties win 70 out of 135 seats. Spanish yields fell from 1.61% to 1.54% over the quarter, but had reached 1.45% at end-November. Italian 10-year yields were down from 2.12% to 1.99% over the quarter, but they sold off by 25 basis points (bps) in December as a general election was confirmed for March. French 10-year yields finished three bps higher on the quarter after rising from 0.68% to 0.78% in December. The Bund curve flattened with 10-year yields dropping from 0.47% to 0.43%, five-year yields rising from -0.26% to -0.19% and two-year yields from -0.69% to -0.62%.
In the UK, ten-year gilt yields were down from 1.36% to 1.19% with less pronounced decreases for five and two-year maturities. A November rate hike by the BoE was well anticipated and was accompanied by dovish guidance. Economic activity remains subdued and political uncertainty continues.
Corporate bonds capped a good year with positive total returns, outperforming government bonds. Investment grade credit saw stronger returns than high yield, aside from in Europe, as the latter experienced challenging conditions in November having reached elevated valuations. The BofA Merrill Lynch Global investment grade (IG) index total return amounted to +1.0%, and for high yield +0.5% (returns in local currency). Sterling IG credit was the strongest. Euro and sterling high yield made good returns.
Convertible bonds globally benefited from the strong equity market rally in the fourth quarter. However, the significant write-down of Steinhoff, an international furniture retail holding company, had a strong negative influence on several of the convertible bond indices. The traditional benchmark for balanced convertible strategies, the Thomson Reuters Global Focus (hedged in USD), was only up 0.1% for the quarter. Convertible bond strategies with an underweight or zero weight in the three outstanding convertibles of this company were generally able to exceed the benchmark. Volatility picked up a little over the quarter, and valuations of convertible bonds cheapened.
The Bloomberg Commodities index posted a robust return in Q4 of +4.7%, underpinned by a rally in industrial metals and energy. In industrial metals, nickel (+22%) and copper (+12%) and iron ore (+12%) posted the strongest gains as Chinese demand remained firm. Together with measures aimed at lowering environmental emissions, which have led to an increase in supply discipline, this put upward pressure on prices.
A review of markets in Q3 2017, when US equities powered ahead but political uncertainty and trade fears weighed on several other regions.
October 5th, 2017
The S&P 500 recorded a total return of 4.5% over the period. US equities were supported by generally positive macroeconomic data, including news that the economy grew at a healthy 3.1% rate in the second quarter (annualized). A robust quarterly reporting season and further weakness in the dollar were additional tailwinds as US equities recorded new record highs.
Sentiment was undimmed by increased political uncertainty amid rising tensions with North Korea and the ongoing failure of the Trump administration to realize its policy goals. In the wake of hurricanes Harvey and Irma, both economic data and forward-looking activity indicators deteriorated towards the period end. However, the market judged that any potential negative impact on growth would be transitory, as did the Federal Reserve (Fed) in its statement following the latest Federal Open Market Committee (FOMC) meeting.
The FOMC statement confirmed that measures to reduce its balance sheet would begin in October, despite persistently weak inflation. The upbeat tone of the report, and accompanying press conference by Fed chairman Janet Yellen added to expectations for a further increase in US base rates this year. Cyclical1 areas of the market performed well, including financials, industrials and energy, with the latter also supported by a recovery in crude oil prices.1Cyclical stocks are those whose business performance and share prices are directly related to the economic or business cycle. Defensives are those whose business performance is not highly correlated with the larger economic cycle - these companies are often seen as good investments when the economy sours.
European equities notched up a modest advance in the third quarter. The MSCI EMU index returned 4.3%. Eurozone economic data remained robust over the three months. GDP growth was confirmed at 0.6% in the second quarter, up from 0.5% in the first quarter. The European Commission’s economic sentiment indicator rose to 111.9, its highest level since July 2007.
Unemployment in the eurozone remained at 9.1% in August -stable compared to July and the lowest rate since February 2009. The possibility that the European Central Bank (ECB) could reduce its stimulus measures continued to be a focus for the market. In September, ECB President Mario Draghi said that the central bank governing council had discussed various scenarios to do with the quantitative easing program. Details are expected to be released in October. The prospect of tighter monetary policy pushed up the euro for much of the period. In late September, a weaker-than-expected performance for Angela Merkel’s CDU/CSU in the German elections saw the euro soften slightly. Energy was the top performing sector as oil prices edged higher over the quarter. In general, more cyclical sectors were the best performers while defensives lagged. Materials and information technology were also among the top performing sectors while healthcare was the only one to register a negative return for the quarter. UKUK equities rose over the period amid a stable global growth outlook.
Sterling strengthened against a weak dollar, and noticeably so in September after the Bank of England (BoE) indicated it would normalize base rates relatively soon. The appreciation in the currency negatively weighed on the market and the FTSE All-Share rose 2.1% on a total return basis, a relatively poor performance versus global equities.
The resources sectors performed well. Mining outperformed in line with higher industrial metal prices with news of resilient Chinese growth in the first half of 2017. Industrial metal prices were also supported by supply-side constraints and weakness in the US dollar. Meanwhile, the oil & gas sector performed very well against the backdrop of higher crude oil prices.
Industrials also outperformed over the period, and a number of domestic areas of the market did well too. Having been out of favor in recent quarters some domestic cyclical areas bounced back sharply, in line with the recovery in sterling. On the negative side, many of the internationally diversified defensive areas of the market performed poorly against the backdrop of sterling strength and rising long-term government bond yields. Bond yields rose as central banks moved to tighten monetary policy. These factors contributed to a poor performance from the FTSE 100, which rose by 1.8%, versus a 3.9% total return from the FTSE 250 (ex-investment companies).
After moving sideways in July and August, the Japanese market rose in September to record a gain of 4.7% for the quarter. The market rise was led by oil and mining stocks although a weaker tone for the currency later in the quarter also helped auto stocks to outperform. One persistent feature for much of the period was the underperformance of financial-related and real estate stocks, with all the subsectors declining in absolute terms despite the market’s rise.
Political events moved rapidly. The quarter started with a sweeping defeat for the LDP in the Tokyo Assembly elections at the hands of Governor Koike, but ended with Mr. Abe calling a snap general election to be held in late October. This appears to be a calculated gamble by Prime Minister Abe to take advantage of a rebound in his personal popularity which had previously dipped sharply following some relatively minor scandals. With other opposition parties in disarray, Ms. Koike is in the process of forming a new party to contest the election but it may prove difficult to quickly replicate her local success at the national level.
Economic data continued to improve. Data released in September for industrial production was better than forecast and there was also a jump in headline inflation, with core CPI rising to 0.7%. The Bank of Japan released its quarterly Tankan survey showing further improvements in business conditions.
Meanwhile, there were no changes in policy from the Bank of Japan. Ten-year bond yields remained close to the central bank’s target of zero percent. The gradual but consistent improvements in the economic environment were reflected in corporate results for the first quarter of the fiscal year. The majority of companies reported better-than-expected results and there has been a strong cycle of upward revisions in consensus profit forecasts during the past three months.
For the second consecutive quarter, the principal risks have come from outside Japan as the uncertain prospects for the implementation of a US growth-oriented policy and moves towards increased isolationism have held back sentiment. The escalation of tension over North Korea also continued to create uncertainty.
Asia ex Japan equities continued on their solid run so far in 2017, delivering positive returns in the third quarter on the back of dovish signs from the US Fed and more upbeat sentiment on the Chinese economy. Chinese stocks led regional gains as they advanced strongly on signs that growth was picking up momentum. Share prices were supported by better-than-expected data for the world’s second-largest economy, with GDP expanding in the second quarter by 6.9% year-on-year – maintaining the same pace of growth from the first quarter.
A stronger yuan also helped ease any fears over capital outflows as the currency advanced +1.9% against the US dollar over the quarter. In nearby Hong Kong, stocks gained on positive sentiment surrounding China and on a solid earnings season for a number of its blue-chip companies. In Taiwan, stocks finished the period marginally ahead with the island’s technology sector driving gains.
Korean equities shrugged off rising tensions with North Korea to deliver solid gains during the quarter on the back of robust global demand. Meanwhile in ASEAN, Indonesian equities declined while Philippine stocks advanced. Thai stocks were the biggest winner in Southeast Asia and rose on hopes that increased spending would spur growth. Indian equities finished the quarter ahead, helped by an interest rate cut early in the period, but later gave up some gains on profit-taking.
Emerging markets (EM) equities recorded a robust return in Q3 with a backdrop of steady global growth and modest inflation proving supportive. US dollar weakness, continued momentum in the Chinese economy and a pickup in commodity prices were all positive for EM equities. Brazil was the strongest index market. Some reform progress, coupled with diminished prospects of a return to power for the leftist Workers Party in the 2018 presidential elections, were a tailwind.
Furthermore, the central bank was able to ease policy as inflation continued to fall. Russian equities rallied as crude prices picked up and lower inflation opened the door for further interest rate cuts. China performed strongly as Q2 GDP growth increased 6.9% year-on-year, showing little impact from the authorities’ moves to selectively tighten liquidity.
Elsewhere, Chile and Peru benefited from improved commodity prices. In Chile, sentiment was also boosted by opinion polls which showed center-right candidate, Sebastian Piñera, had extended his lead ahead of a presidential election in November. The CE3 markets of Poland, Hungary and Czech Republic also registered strong gains. In contrast, Pakistan posted a negative return and was the weakest index market as the Supreme Court disqualified the prime minister from office. Greece declined amid a sell-off in banking stocks. Turkey also underperformed, largely due to weakness in September as the Fed announced plans to reduce its balance sheet. Tighter global liquidity is negative for Turkey due to its high current account deficit.
Bond yields oscillated over the quarter and, with the exception of the UK, which sold-off sharply in September, were ultimately little changed against a largely unchanged global economic backdrop. While the late-June selloff initially continued in July, it came to a halt as growing expectations of a hawkish shift among central banks were reined in. Yields moved lower in August, precipitated by safe haven buying, before reversing course once more in September as risk appetite returned. The global economic upswing continued with data confirming the US second quarter growth rebound.
The “Goldilocks” scenario of moderate expansion combined with only moderate inflation, particularly in core measures, allowing for gradual withdrawal of monetary stimulus remained in place. The Federal Reserve (Fed) announced it will commence the reduction of its balance sheet at a rate of $10 billion a month from October. The European Central Bank (ECB) gave indications it is preparing to taper its quantitative easing (QE).
The quarter saw a marked escalation in tensions between the US and North Korea. The tensions were a key factor behind the temporary rotation into lower-risk assets in August. During the quarter however there was little policy progress, although a framework tax reform plan, largely confirming plans for significant tax cuts, was unveiled in late September.
The economy showed clear signs of slowing down, while inflation picked up, reaching 2.9% in August. During the quarter the Bank of England struck a more hawkish note with Governor Carney and a number of members of the Monetary Policy Committee openly discussing rate rises. This occurred against a backdrop of above target inflation and low unemployment, leading to a significant increase in UK government bond yields and a rally in sterling against both the euro and the dollar.US 10-year yields began the period at 2.31% and finished at 2.33% with Bund 10-year yields virtually unchanged from 0.47% to 0.46%. 10-year UK gilt yields rose 10 basis points (bps) to 1.36%.
The move reflected higher inflation and more hawkish central bank rhetoric. Corporate bonds made positive returns, outperforming government bonds. Global investment grade (IG) credit rose 1.14% and high yield (HY) by 2.16%. The US led the way with IG gaining 1.37% and HY 2.04%. Global equity markets finished the third quarter 2017 in positive territory with September the decisive positive month of the period. Convertibles thrived in this benign environment of rising markets. The Thomson Reuters Global Focus convertible bond index returned 1.4% in US dollar terms. Implied volatility, as a typical measure of the price of the conversion right, stayed low.
However, convertibles richened and, especially in Europe, valuations look a bit stretched. On a positive side, the new issuance market for convertibles remained very active with just under $20 billion of new paper being issued.
The Bloomberg Commodities index rose in Q3. The energy component generated the strongest return, with Brent crude rallying 20.1% over the quarter. It was supported by a faster-than-expected fall in US crude inventories and increased expectation for an extension of production cuts amid rising global demand. Industrial metals also recorded a robust return as economic momentum in China remained firm.
Iron ore was up 14.9% while zinc (+15.5%) and copper (+9.5%) both posted sizeable gains. In contrast, the agricultural component lost value. Wheat and corn prices fell sharply amid record global supplies. In precious metals, gold was up 3.2%, in part given an uptick in geopolitical concerns.
An overview of markets in Q2 2017 when equities were supported by encouraging corporate earnings and a generally positive economic picture.
July 6th, 2017
The S&P 500 recorded a total return of 3.1% over the quarter. US equities advanced despite some mixed economic data while the Federal Reserve (Fed) looked through disappointing inflation readings and further tightened monetary policy. At the June meeting of the Federal Open Market Committee the US central bank raised base rates by 25 basis points and set out detailed plans to reduce its balance sheet.
A number of forward-looking activity indicators failed to build on the highs they achieved in Q1 2017, including those tracking the health of the manufacturing and consumer sectors. However, official consumer spending data remained resilient, adding to hopes the US economy would bounce back in the second quarter following GDP growth of 1.4% in Q1 (annualized).
Political uncertainty remained an important feature in the market as President Trump dismissed the FBI director James Comey. This raised doubts over the ability of the administration to push its fiscally expansive policies and also weighed on the dollar. The dollar was further negatively impacted amid rising expectations that central banks in other major developed economies are also preparing to tighten monetary policy.
Large cap equities outperformed small and mid-caps over the period, with the Russell 2500 and Russell 2000 recording respective total returns of 2.1% and 2.5%. Healthcare, industrials and financials were among the top-performing sectors, while consumer staples, energy and telecommunication services underperformed.
Eurozone equities advanced in the second quarter with the MSCI EMU index returning 1.8%. Reduced political risk, positive economic backdrop and improved corporate earnings all helped to support share prices.
However, the final week of the quarter saw a pullback after upbeat remarks by European Central Bank President Mario Draghi were interpreted to mean that economic stimulus measures could soon be withdrawn. Political risk was the focus in the early part of the quarter as the French presidential elections approached. However, centrist and pro-EU candidate Emmanuel Macron won a convincing victory and his new party also won a significant proportion of seats in the legislative elections.
Markets responded positively as this should enable him to push through his reform agenda and the risk of a eurozone break-up has greatly diminished. Economic news continued to be encouraging, with forward-looking indicators suggesting a pick-up in growth. The German Ifo business climate survey reached another record high in June. Eurozone annual inflation dipped to 1.3% in June from 1.4% in May but ECB President Draghi commented that the threat of deflation is over. The first quarter corporate earnings season was positive with many companies reporting both sales and profit growth.
Despite the generally brighter backdrop, the top sector performers were largely in defensive1 areas of the market. Real estate and utilities were the top gainers, with utilities were boosted by merger & acquisition speculation. The energy sector registered a negative return for the quarter.
The UK equity market was volatile over the quarter amid uncertainty over the economic outlook, the political backdrop, and the future path of monetary policy.
The FTSE All-Share generated a total return of 1.4% (generally supported by robust corporate results), although there was a marked variation in performance during the period.
The market failed to make progress over April as it was held back by the large-cap resources sectors against the backdrop of weaker crude oil and industrial metal prices. By contrast, domestic cyclical areas of the market performed well (as did sterling) after the UK prime minster called the snap general election for 8 June. At the time it was widely anticipated that the Conservatives would strengthen their majority, putting them on a stronger footing before the start of Brexit negotiations.
UK equities then performed very well over May, led by large caps which rallied amid sterling weakness and a rotation back towards defensive sectors and away from cyclicals. This occurred as concerns around the global economic outlook increased, with mixed economic data out of the Chinese and US economies. There was another step down in commodity prices, further dampening inflation expectations, and questions arose around the ability of the US administration to push through its fiscally expansive policies. Many of the gains in May were undone in June.
UK domestic cyclicals performed poorly as the polls narrowed ahead of the UK general election and sterling weakened further as a hung parliament materialized. An increasingly uncertain outlook for consumer spending also weighed on UK-focused sectors. Meanwhile, defensives reversed some of their gains of the previous month as long-dated government bond yields recovered on the back of comments from ECB Governor Mario Draghi and Bank of England Governor Mark Carney. These were taken to signal a shift towards tighter monetary policy, while the US Fed raised base rates by a further 25 basis points.
After weakening in the early part of April, the Japanese market trended upwards for most of the quarter to end 6.8% higher. The Japanese currency was volatile throughout the period, reflecting global uncertainty, but ended on a softer note against most major currencies. The Bank of Japan’s policy meeting passed without any change but the Bank did revise up its assessment of the economy, using much more positive language than has been seen for several years.
The corporate results season for the fiscal year to March 2017 was completed in May, with a majority of companies reporting profit figures above expectations. Companies’ own forecasts for the new fiscal year are slightly lower than expected but look excessively conservative in light of recent economic data. Defensives are those whose business performance is not highly correlated with the larger economic cycle - these companies are often seen as good investments when the economy sours. Cyclical stocks are those whose business performance and share prices are directly related to the economic or business cycle.
At first sight, some of Japan’s data releases at the end of the quarter looked a little weak, including the industrial production number for May. Nevertheless, the evidence from the quarterly Tankan survey clearly indicates growing confidence among Japanese corporates. The aggregate survey responses now indicate a shortage of capacity across all sizes of firms. This is a meaningful change from the excess capacity situation the economy has faced for almost all of the last 20 years.
Despite this relatively positive backdrop, an improvement in equity market sentiment was constrained by geopolitical events and, in particular, a significant escalation in tension around North Korea. There was no clear pattern to sector performance. Real estate stocks and leasing companies performed well as they rebounded from the relative lows seen at the end of March, while insurance stocks underperformed.
Cyclical sectors also showed a mixed performance with paper stocks and chemicals rising by more than the market, while steels, autos and shipping stocks lagged. The strongest sector by far was “other products”, driven by the continued rise in Nintendo’s share price.
Asia ex Japan equities continued on their strong run in 2017 to record another period of solid gains in the second quarter. These came on the back of improving data for the Chinese economy and a broader risk-on approach from global investors. Chinese stocks saw robust gains over the period as better economic data and a landmark decision in mid-June, by index provider MSCI, to include Chinese A-shares in a range of its benchmark indices supported sentiment.
The Chinese yuan also finished up strongly as the currency rebounded over the period to finish up 1.6% against the US dollar. In nearby Hong Kong, stocks tracked China markets higher on investor optimism following a solid earnings results season for its blue-chip heavyweights. Over the strait in Taiwan stocks advanced led by the island’s technology sector. Korean stocks were among the region’s best performers after an election victory for new President Moon Jae-In – who is looking to reinvigorate the economy and implement meaningful corporate governance reforms.
In ASEAN, all markets finished up with Indonesia and the Philippines the strongest performers while Thailand underperformed the region. Meanwhile in India, stocks gained but also underperformed broader regional returns on the possible short-term impact of the implementation of its much-awaited national goods and services tax (GST) at the start of July.
Emerging market equities were beneficiaries of a supportive global backdrop in the second quarter, in particular US dollar weakness. The MSCI Emerging Markets index registered a strong gain and outperformed the MSCI World index. Further signs of improvement in global growth were positive for markets including Poland, Korea and Taiwan. Elsewhere, Turkish equities rebounded strongly with US dollar weakness, domestic stimulus and a firmer outlook for exports to Europe all boosting sentiment.
China also recorded a strong gain as macroeconomic data remained firm, despite measures to gradually withdraw liquidity. Greece was the strongest index market as the country reached agreement with Eurogroup creditors for the release of an €8.5 billion loan tranche. This covers upcoming debt repayments in July. In contrast, Russian equities and the rouble lost value, with a sharp decline in Brent crude the key headwind.
Brazilian equities were also lost value as political risk increased following corruption allegations against President Temer. Qatar was the weakest market, negatively impacted by the imposition of an economic and diplomatic blockade by neighboring countries, notably Saudi Arabia.
Continued accommodative monetary policy, positive economic data and still subdued inflation provided a healthy backdrop for bonds over the quarter. Demand for risk assets was strong to the benefit of corporate 2 China A-shares are the shares of companies incorporated in mainland China and traded in Shanghai or Shenzhen, quoted in Chinese renminbi.
European economic indicators remained strong, with purchasing managers indices (PMIs) at multi-year highs. The US showed signs of rebounding after a slow start to the year as consumption recovered. Inflation has still not taken hold convincingly though, either in the US or Europe.
Politics remained a prominent theme with further controversies relating to President Trump. In particular, the sudden and controversial dismissal of the Head of the FBI in May raised questions of the possibility of impeachment. In Europe, French and Italian spreads narrowed as political uncertainty faded. The moderate Emmanuel Macron won the French presidential and later parliamentary elections convincingly, while the possibility of an early election in Italy was ruled out.
The quarter saw doubts emerging around the Trump “reflation trade” with the administration still yet to make a meaningful fiscal policy announcement. This helped to keep longer-dated US Treasury yields anchored though the two-year yield rose steadily from mid-April onwards pricing in another rate hike ahead of the decision in June.
Government bond yields were well supported for most of the quarter, but a sell-off in the final week reversed earlier gains for Bunds and gilts and pared gains for US Treasuries. This sell-off was drawn by comments from central bank leaders in the US, Europe and the UK, taken as signaling increased hawkishness. The move was more pronounced in Europe and the UK than in the US with the euro and sterling rising against the US dollar. The US 10-year yield fell from 2.39% to 2.30% over the quarter and the five-year from 1.92% to 1.89%. Two-year yields rose from 1.25% to 1.38%. The 10-year Bund yield rose from 0.33% to 0.46%, the five-year increased from -0.38% to -0.22% and two-year from -0.74% to -0.57%. The 10-year gilt rose from 1.14% to 1.26%. Five-year yields rose from 0.56% to 0.70% and two-year yields increased from 0.12% to 0.36%.
Corporate bonds performed strongly, well ahead of government bonds, with investment grade credit rising 1.75% and high yield 1.98% (in local currency). Buoyant equity markets provided good tailwinds for convertible bonds in the second quarter. The Thomson Reuters Global Focus convertible bond index finished the quarter with a strong gain of 1.59% in US dollar terms.
With rising markets, a lot of convertibles moved in the money5 and the average equity exposure has increased – especially among the Nasdaq-related US information technology names. In Europe, our models indicate high convertible valuations. Japan and Asia are the regions which still offer many attractive convertible bonds. The primary market remained very active with almost $15 billion of new convertible bonds coming to the market.
The Bloomberg Commodities index declined in Q2. Energy was the weakest component as Brent crude fell 9.3%. OPEC members and other producer nations extended production cuts but these were not as deep as the market had anticipated. The weakness was exacerbated by rising US production. Industrial metals were down, with iron ore falling heavily on concern of weaker demand from China and elevated stockpiles in the country. The agriculture component was down slightly with declines in sugar and coffee the key headwinds. In precious metals, silver was particularly weak, falling 9.3%, but gold was more resilient.
TFR Global Name Gold As The 'Superhero' As Prices Soon To Hit $1,350, Stock & Currency Markets Remain Troubled, Geo-Political Tensions Increase Giving Investors The Perfect Buy Opportunity
April 17th, 2017
Gold gained $30 last week as concerns over global economic growth, declining stock markets and currency instabilities continued the demand for safe-haven assets, with gold now at the top of the list for all investors.
Furthermore, geo-political tensions increased as the U.S. embarked on a series of airstrikes over Syria which Russian president Vladimir Putin, claimed were ‘unjust and immoral’.
The metal is now up over $120 already this year with forecasters expecting at least another $140 to $160 increase before year end taking it to $1,400 plus an ounce.
The precious metal has benefited due to a weakening of U.S., Chinese and Euro-Zone economies and increased geo-political turmoil.
“Gold has already done extremely well this year and will continue to do so with the current uncertainty around the world along with the fact that tensions between the U.S. and Russia are increasing. The potential for future gains is now enormous. Any investor that cannot see gold’s potential is blind, it's that simple,” said Graham Cordier, senior analyst with HSBC, Hong Kong.
“Investors are now buying the metal whether it's on a dip or on a rally. Usually it would be bought more on dips, and sold more on rallies but not anymore, they're buying it regardless of its current movement because they know, as I do, it's going to increase past what they paid very quickly, precisely what an investment should do” said Georgette Boele, a strategist at ABN Amro Bank.
According to Dennis Tillman, Founder and Chairman of TFR Global, “Gold will soon hit $1,350 an ounce as risk aversion intensifies.”
Tillman has dubbed bullion a 'superhero' when raising his outlook for 2017 to over $1,400 from his previous estimate of $1,270.
“Since the start of the year one superhero has stood up strong providing shelter to investors, and that's gold. You buy it, it increases in value, you sell it and you make money, you then buy more and sell it and you continue this cycle, how difficult is that to understand,” Tillman concluded.
"Gold is putting in a very good performance and there is now nothing to stop it, the fact that we are seeing higher lows and higher highs points to an investor active asset which has gained momentum and I do not foresee this slowing down anytime soon," said MKS head of trading Afshin Nabavi.
"There is now a clear shift in investor sentiment towards the precious metal, everybody, and I mean everybody, can now see its returns’ potential and therefore we expect gold to reach $1,400 plus by the end of the year," said Carsten Fritsch, senior analyst at Commerzbank in Frankfurt.
"The majority of fund flows that we've seen so far this year have been due to new money coming in. It is wise to understand that when new monies go into markets, they always encourage further new monies which always pushes prices upwards," said Credit Suisse's head of precious metals research, Tom Kendall.
“In fact, if the global economy does not get through this soggy patch quickly, which we cannot see it doing, gold could rise all the way to $1,500 this year. I wouldn't be surprised if we see it trade up considerably above $1,300 in the coming weeks as the momentum that we're seeing here is not going to exhaust itself anytime soon," Kendall added.
“For some people, they need a proverbial safe to fall on their head to make them realize the potential an investment has,” said Peter Schiff, famous gold analyst and CEO of Euro Pacific Capital.
“Astute investors have already been buying it for the past 7 weeks but by the time the less astute figure it out it will be very expensive to buy gold. So why wait, if ever there was an opportunity it’s now to ensure you benefit from all its further gains to $1,400 plus,” Schiff concluded.
An overview of markets in Q1 2017 when an upturn in global economic data boosted stock markets.
April 6th, 2017
US equities performed well as the S&P 500 advanced 6.1%. Macroeconomic data continued to be supportive. Non-farm payrolls were robust and activity indicators buoyant. These included the Institute for Supply Management’s manufacturing purchasing managers’ index (PMI)and the Conference Board consumer confidence index –the latter rose to 125.6 in March, the highest level in more than 16 years.
Reflecting the improving outlook for growth and inflation the Federal Reserve (Fed) raised base rates by 0.25% at the March meeting of its Federal Open Market Committee. The market remained optimistic over Donald Trump’s plans to cut taxes, boost infrastructure spends and reduce the regulatory burden on business. However, the failure at the period end to pass revisions to healthcare legislation did plant doubts about the administration’s ability to implement some of its policies.
Information technology was the top-performing sector, followed by consumer discretionary and healthcare. The energy sector lagged the market, in line with the decline in crude oil prices. In a reversal of the performance patterns in the fourth quarter of 2016, small and mid-cap equities trailed large caps, with the Russell 2000 and Russell 2500 recording respective gains of 2.5% and 3.8% over the period.
European equities were strong in Q1 with the MSCI EMU index returning 7.2%. The period started on a weak note, with negative returns in January, but stock markets picked up as the quarter progressed. Economic data released during the period was largely positive. Leading indicators showed gains with the flash composite purchasing managers’ index reaching a near six-year high of 56.7 in March. Inflation, as measured by the consumer price index, picked up to 2.0% in February, albeit slipping back to 1.5% in March.
Non-farm payrolls are a means of measuring employment in the US and represent the total number of people employed, excluding farmworkers, private household employees and those employed by non-profit organizations.
The ECB upgraded its 2017 and 2018 growth and inflation forecasts but pledged to keep existing stimulus in place until the end of the year. Political worries receded as the center-right won the Dutch elections in March, fending off the challenge from the anti-EU party led by Geert Wilders. Meanwhile, opinion polls suggested that the odds of a Marine Le Pen win in the French presidential election are low and diminishing.
The information technology sector was the top performer, followed by utilities and industrials. Energy was the only sector to register a negative return. The quarterly earnings season was a positive one for European equities, with many firms reporting double digit earnings growth and confident outlooks for 2017.
The FTSE All-Share index rose 4.0% amid further evidence of a recovery in the global economy. The UK domestic economy also proved more resilient than expected. The Bank of England upgraded its 2017 UK GDP growth projection (from 1.4% to 2.0%) due to stronger-than-expected consumer spending following the “leave” decision in the EU referendum.
Many cyclical sectors continued to outperform, building on their very strong performances at the end of 2016. However, the so-called “reflation trade” lost some momentum as President Trump failed to pass revisions to healthcare legislation.
Mergers & acquisitions (M&A) were an important theme: British American Tobacco agreed to acquire the outstanding stake in Reynolds American it does not already own; Unilever received a bid from US peer Kraft Heinz; and Reckitt Benckiser agreed to acquire American baby milk manufacturer Mead.
Domestic M&A also picked up, such as Standard Life’s deal to acquire Aberdeen Asset Management. Sterling strengthened over the period against a weaker US dollar. Prime Minister Theresa May suggested the UK was heading towards a harder variant of Brexit as she set out the government’s negotiating priorities in her Lancaster House speech in January. She triggered Article 50 in March to begin the two-year exit process.
The Japanese stock market traded in a tight range throughout the quarter, registering a total return of just 0.6%. After weakening sharply at the end of 2016, the Japanese yen appreciated gradually in the past three months. From Japan’s perspective, the main political event was the meeting in February between Prime Minister Abe and President Trump in Washington and Florida.
The meeting appeared to be surprisingly cordial despite the previous US rhetoric around trade imbalances and Japan’s foreign exchange policy. A decision taken by the ruling Liberal Democratic party in early March has enabled Mr. Abe to continue as the party’s leader for another term, if he wishes. However, recently Mr. Abe has faced the first significant political scandal of his current tenure. This stemmed from the sale of public land in Osaka which was destined to be used as a kindergarten by an extreme-nationalist educational organization. This issue has led to the first significant dent in Mr. Abe’s public approval rating.
Meanwhile, the corporate results period for the quarter to December concluded in mid-February. Overall, the results were very solid with over 60% of companies reporting positive surprises compared to the consensus. Earnings revisions have been strongly positive in the early part of the year and, although profit trends remain favorable, forecasts now include much of the positive impact of the yen weakness seen in the second half of 2016.
Across the quarter, the stock market was led by cyclical sectors such as marine transportation, paper stocks and chemical companies as investors continued to discount the possibility of stronger global growth. Financial-related sectors, including banks and leasing companies, lagged the market although all of their Cyclical stocks are those whose business performance and share prices are directly related to the economic or business cycle.
Defensives are those whose business performance is not highly correlated with the larger economic cycle-these companies are often seen as good investments when the economy sours. Reflation is a fiscal or monetary policy designed to expand a country's output and curb the effects of deflation.
Real estate stocks have shown a more consistent pattern of underperformance and were the weakest sector in the quarter.
Asia ex Japan equities rebounded strongly from the last quarter of 2016 to post strong positive returns in the first quarter of the new year, spurred on by the broader “Trump bump” rally seen in global stock markets. In China, stocks gained strongly and had their best first quarter in over 10 years, driven on by continued positive news for the world’s second-largest economy. Better-than-expected data and a stabilizing Chinese yuan led to improved sentiment among investors.
Ongoing restrictions on the property market and a tightening on capital outflows also saw liquidity diverted into equities. In nearby Hong Kong, stocks tracked China markets higher on investor optimism as well as strong buying interest from Mainland Chinese investors via the Southbound Stock Connect scheme. Over the strait in Taiwan, stocks hit a near two-year high as foreign investors returned to the market while Korean equities also advanced strongly on the back of its technology sector. In ASEAN, Indonesian, Thai and Philippine stocks all gained although the Philippines was the regional underperformer as concerns lingered over the weakness of its currency and the erratic policymaking of President Duterte.
Meanwhile, Indian stocks led gains in Asia as its market finished strongly up on the back of investor optimism surrounding Prime Minister Modi’s reform agenda following a resounding victory for his party (the BJP) in state elections in March.
The MSCI Emerging Markets index posted a strong gain, with US dollar weakness providing a tailwind to returns. An upswing in global growth and a lack of follow-through on protectionist trade policy from the Trump administration supported risk appetite.
Korea, Mexico, Taiwan and China all benefited from these factors and outperformed. In China, the weaker US dollar also served to alleviate concerns over capital outflows while economic data stabilized. Indian equities rallied as GDP growth appeared to shrug off demonetization concerns. The ruling BJP also performed well in state elections, reflecting support for ongoing reforms. Poland was the strongest index market as positive economic data increased expectations for growth this year.
By contrast, Russia posted a negative return and was the weakest index market. A decline in energy prices and reduced optimism towards a significant improvement in relations with the West were the key headwinds. Greece also recorded a negative return with banking stocks leading the market lower.
Optimism over the strengthening global economy and potential pro-growth effects from President Trump’s fiscal stimulus plans continued to drive markets in Q1. Data showed real economic activity continuing to pick up with yet further evidence of synchronized global reflation underway. The shift toward monetary policy normalization also continued. The Fed raised rates and the ECB signaled it sees less need for accommodative policy going forward.
Detail over Trump’s fiscal plans remained generally thin, but significant doubts about his ability to implement reform were planted in March after a failure to pass healthcare legislation. Politics in Europe remained a worry for markets as nationalist politicians continued to command support, although concerns receded somewhat towards the end of the period. Against the backdrop of strengthening growth, rising inflation and marginally more hawkish central banks, global credit, particularly high yield, outperformed government bonds.
Global high yield credit outperformed government bonds by 2.4% on an absolute return of 2.8%. UK high yield proved particularly strong with a return of 3.3% and outperformance of 2.8% above government bonds. Global investment grade corporate bonds rose 1.2% outperforming government bonds by 0.7%. 4Investment grade bonds are the highest quality bonds as determined by a credit ratings agency. High yield bonds are more speculative, with a credit rating below investment grade.
Among government bonds, Europeans sovereigns came under pressure amid political concerns and markets starting to adjust to the prospect of monetary stimulus withdrawal. Spreads on French and Italian bonds over Bunds widened markedly reflecting political risk. French 10-year yields rose from 0.67% to 0.97% and Italian 10-year yields from 1.81% to 2.31%. Ten-year Bund yields rose from 0.21% to 0.33%. US and UK government bonds performed better. The US 10-year yield came in from 2.44% to 2.39% and the UK’s from 1.24% to 1.14%.
Global equity markets continued with positive momentum into 2017. Global convertible bonds benefited from this rally with the Thomson Reuters Global Focus convertible bond index finishing Q1 with a strong 2.83% return in US dollar terms.
Buoyant equity markets have moved the overall equity exposure of convertible bonds upwards. Above-average issuance, especially from US companies, meant a stable supply of balanced bonds. For the first quarter, $24 billion of new convertibles came to the market, indicating a good chance of a growing convertible bond universe in 2017. Also, global convertible funds are seeing positive flows again, after bigger outflows from the asset class during 2016. On balance, our models signal that a large part of the global convertible market remains fairly valued, albeit bargains have become more difficult to find.
The Bloomberg Commodities index lost ground in Q1, largely due to a decline in the energy component. Brent crude fell -7% as oil inventories and production in the US increased at a faster rate than expected. Natural gas was down -14.3% and coal declined -8.7%. The agriculture component was also weaker, largely attributable to weakness from sugar and soybeans prices. By contrast, industrial metals generated a positive return. Iron ore rallied 5.7% while copper (+5.8%) and zinc (+7.5%) also rose on higher demand from China. Precious metals finished in positive territory, with gold (+8.3%) and silver (+14.2%) both posting gains.
TFR Global Announces The Anticipated Return Of The Gold ‘Super Cycle,’ Best Opportunity For Gold Investments As Brexit And Trump Cause Market Uncertainties
March 24th, 2017
In an ongoing effort to continuously educate clients and investors, TFR Global announces their take on the return of the current gold super cycle along with their company’s specific strategy designed to give investors potential from further price increases.
TFR Global’s CEO, Dennis Tillman, himself a 25-year veteran of precious metals’ trading, explains it this way, “The recent increase in the price of gold has come to a point where, simply put, it is no longer advisable to ignore the metal’s investment potential. The increase in gold prices of roughly 11% since January causes an investment demand, which in turn will continue to increase its forward value.”
What Tillman talks about is generally referred to as a ‘Super Cycle.’ After prices drop, as they did in 2013, the market will begin a reversal where prices start to rise as a result of certain fundamentals. This can result in new all-time highs. Most investors now agree and see the future for gold as ‘extremely bullish’ with unlimited upside potential and very little downside.
“We advise clients on how best to make money and the issues surrounding the UK’s intentions to leave the EU and the Federal Reserve still unsure of Trump’s fiscal measures has created a perfect safe-haven for the metal and with it a fantastic investment opportunity. This is really one of the best opportunities of the past 3 years for investors who are interested in getting involved with gold,” says Tillman.
“We’ve had gold price gains since January, and we have good fundamentals in place for a bullish future. That said, we also show our clients how to protect their downside with our trading strategies should we need to. Now is a great time to make money in gold, and we are showing all of our retail clients, along with our institutional investors, how to make sizeable returns from the current market fundamentals at play.”
“I am continuously surprised as to just how many individuals don’t know that their portfolio should hold gold. In fact, one of the most common questions a prospective clients asks is: ‘What percentage of gold should my portfolio hold?’ Obviously, that has a lot to do with the upside potential expected, but with all things being as they currently are, somewhere around 20% to 30% of a balanced portfolio should be in gold,” Tillman concluded.
We believe that careful and well thought out planning and advice go together for all investment types. Our advisors work daily with different kinds of investors in different stages of life. So, no matter what your position is in life right now, we can help you get to where you want to go. Our investment options are personalized to meet your expectations and your life goals.