Market Noise: Lowering the Volume for Summer

Observations on the Capital Markets – Week Ended June 27, 2014

Summer, summer, summertime – time to sit back and unwind. The Fresh Prince and DJ Jazzy Jeff might have been talking about the quiet tone last week in the capital markets.

  • Can you spell Goldilocks? Stocks, bonds, and commodities all rallied in the first half of 2014…for the first time since 1993.
  • Currencies: The Euro and Yen each rose 0.5%-1% against the dollar, extending their gains for the month.
  • Bonds: The 10-year Treasury yield fell 9 basis points (bps) to 2.54%; the 10-year TIP yield fell 8 bps to 0.27%.The Bank of America Merrill Lynch High Yield Index (BoAML HY) widened 1 bp to 3.48%. The Japanese 10-year bond fell to 0.55%, a 2014 low. Eurozone bond markets were generally quiet.
  • Equities: The S&P 500 Index declined almost imperceptibly last week. Within the index, Utilities and Consumer Discretionary (each up 1.0%) led; media companies rallied when the Supreme Court effectively shut down Aereo. Industrials (-1.7%) lagged; Consumer Staples (-1.3%) and Energy (-0.9%) were also weak. MSCI Europe and Japan were each down 1.5-2%. The MSCI Emerging Markets Index was down a bit.
  • Commodities: WTI Oil was down about $1 (1%)…still not really reacting to Iraq. Gold, up 3% last week, gained another $5 (0.5%).

Continue reading

EM Update: Central Banks & Monetary Policies

Pioneer’s Head of Global Asset Allocation Research, Monica Defend, recently released an in-depth macro report on Emerging Markets. Here are some of her updates on EM monetary policies. You will find a link to the full report at the end.


ASIA

  • China – The implementation of fiscal reform is proceeding as ten local governments will be allowed to issue bonds with full responsibility of repayment. Even though the economic slowdown would suggest a stronger monetary easing, in the ongoing process of liberating interest rates and increasing efficiency in credit allocation, monetary policy must remain prudent to prevent a return to the old model of allocation and growth. The latest reserve requirement ratio cut for some qualified banks supports this attitude of the People’s Bank of China.

Continue reading

An Accommodative Fed and a Strengthening Economy Outweighed Geopolitical Fears

Observations on the Capital Markets – Week Ended June 20, 2014

Iraq news didn’t spark a flight to safety and it’s not yet clear whose side we’re on (or should be on). Fed policy seems to be on autopilot, which the markets interpret as dovish. As expected from last week’s FOMC meeting, there was no change to the taper pace or rate policy. The statement’s wording and forecasts were tweaked only slightly from the previous. Higher inflation readings and stronger labor market data didn’t lead to a material change in the language.  For the Fed to react so little to the labor and inflation data apparently led “the market” to think the Fed is even more dovish. The market apparently expects the Fed to be even more dovish than the Fed expects to be. December Fed Fund futures are trading around 1.75%‑well below the Fed’s 2.5% projection. Continue reading

Markets are Unfazed as War Risks Escalate

The Capital Markets Were Very Calm Last Week, Considering The Rising War Risks

  • Equities:  After three strong weeks, the S&P 500 ended the week down 0.7%.  Higher oil prices boosted the index’s Energy sector to a 1.7% return; while all other index sectors declined.  MSCI Europe touched six-year highs mid-week but also ended down slightly less than 1%; MSCI Japan and Emerging Markets were up slightly.
  • Bonds:  The 10-year Treasury’s yield ended unchanged at 2.60%; the 10-year TIP yield rose 1 basis point (bp) to 0.41%.  The BoA Merrill Lynch High Yield index touched new cycle lows mid-week, ending 5 bps tighter at 3.47%.  European bond markets were calm.
  • Commodities: WTI was up $4.10 for the week, to $106.87 on war fears (Iraq is OPEC’s second-largest producer).  Gold was up about 2%.
  • Currencies:  The Chinese yuan and Japanese yen each rose about 0.5% against the dollar; the euro was down almost 1%.

A Black Swan Emerges In Iraq

A week ago, ISIS (Islamic State in Iraq and Syria) in Iraq was off the radar of the news media and market strategists.  It has suddenly emerged from the northwest of Iraq, which borders Syria, as a significant threat to the global economy (higher risk of a recession-causing an oil price spike). ISIS, a non-state Sunni militia and major player in the Syrian civil war, turned east (from Damascus to Baghdad), capturing several key Iraqi cities including Mosul, the nation’s second-largest. The Iraqi army apparently collapsed; Baghdad itself is perceived as threatened.  Continue reading

Seeking New Opportunities in Emerging Markets Debt

Yerlan Syzdykov, Head of Emerging Markets Bond & High Yield here at Pioneer Investments, recently shared his thoughts with London’s press on the challenges of investing in emerging market debt. I thought I would share them here with you as well. The following is a summary of his remarks:

Continue reading

Is the Economic Cycle Dead?

We are fully aware that it is not easy to make short-term macroeconomic forecasts, especially after a financial crisis with the potential to bring long-term headwinds to the economy. The Great Financial Crisis left many legacies. There was the deleveraging phase (as investors paid off debt) that typically follows credit/real estate bubbles. And, there were many dislocations in the job market and in the investment cycle, as well as distortions created by an excess of regulation. Continue reading

Four Reasons to Feel Good about the Economy and the Markets

Market and economic news last week was busy and upbeat. In the capital markets, U.S. Treasuries and gold sold off, but everything else went up. On the global economic front, there were plenty of positive signs as well.

Here are a few highlights:

1. The U.S. economy continues to expand
The Fed’s Beige Book confirms that the economy no longer needs extraordinary support from the Fed. The report showed the economy continuing to expand and the labor market continuing to improve. The pace of growth was characterized as “moderate” in seven districts and “modest” in five – a broad and robust economic recovery (weak nowhere).

Continue reading

Follow

Get every new post delivered to your Inbox.

Join 91 other followers