All Fairly Quiet on the Western Front

181593521Last Week in the Capital Markets

U.S. Equities: The S&P 500 quietly worked higher last week, ending up 1.2%. Materials (+2.8%) and Energy (+2.5%) led. Commodity prices were up last week, and mining companies liked the People’s Bank of China easing. Telecoms, the prior week’s leader, returned -1.7% last week; no other sector ended in negative territory.

  • International Equities: A pretty good week, except in Japan. MSCI Europe was up 2.4% in USD terms…broad rally, with roughly half the gain coming Friday after ECB president Draghi talked of more quantitative easing (QE). MSCI Emerging Markets returned 1.4%. Russia and Brazil had been notable laggards; last week MSCI Brazil rose 12% and MSCI Russia rose 5% in USD terms. MSCI Japan was down 0.9% last week.
  • Bonds: A quiet week for U.S. bonds with high yield bonds lagging again. The 10-year Treasury yield ended one basis point (bp) lower, at 2.31%; The Barclays U.S. Aggregate Bond Index returned 0.1% for the week. The Bank of America Merrill Lynch High Yield Bond Index returned -0.4%. Globally, ECB President Draghi’s comments accelerated a rally in peripheral eurozone (EZ) sovereigns. Japanese 10-year yields declined 2 bps to 0.46%, and German 10-year yields fell 1 bp to 0.73%.
  • Currencies: The dollar rose modestly against the euro and yen; the Russian ruble and Brazilian real bounced. The euro ended the week down 0.5% against the dollar; the yen declined another 0.9%. Most key EM currencies ended up against the dollar. The ruble and real (down 28% and 15%, respectively since June 30) each rose just over 3% last week.

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How to Invest in the Age of Deflation (and High Volatility)

177491798We are convinced that, after the long bull market run, we are now entering a new phase where volatility is going to remain a principal feature and where returns are going to remain suppressed for a long time. What is materially different from the period 2009-2014 is the poisoned combination of higher debt, stretched asset class valuations, higher economic volatility and lower expected effectiveness of central banks’ actions. In our view, this means that the next 3-5 years will be characterized by a framework of lower returns/higher volatility.

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Beyond QE, U.S. Economy is Getting Traction

469780673The Fed confirmed the end of Quantitative Easing (QE) and changed its rhetoric on the job market. The unemployment rate is (finally) gradually declining, as is the underutilization in the labor market, although it remains high by historical standards. The Kansas Fed LMCI Index shows high momentum and an improving level of job market conditions, but keep in mind that not all labor market metrics have recovered to pre-crisis levels. An improving labor market, together with the fall in oil & gasoline prices and some signals of a pick-up in wages should be supportive for consumer confidence, which is close to seven year highs. Continue reading

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Crowding at the Front Gate of the Yield Curve–A Potentially Ugly End

_121371451The low-interest-rate environment we’re in has caused many income-seeking investors to “crowd” into the riskier sectors of the bond market in search of higher yields. In doing so, they may pick up higher yield, but will likely take on higher default or credit risk. Although the Fed may not raise rates until the middle of next year, fixed-income spreads – the difference in yield over Treasuries ‑ may continue to grind tighter, causing further crowding. When interest rates rise eventually, the typical ability of credit markets to buffer losses because of their relatively higher yields, will be modest at best, particularly in short-term bonds. A rush to the exits could be ugly. Continue reading

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Another Week in the Goldilocks Zone

159171378If this isn’t as good as it gets, it’s a lot better than it might have been: the world is swimming in cheap energy, the Eurozone isn’t in recession after all, consumer and business balance sheets are strong and Ebola is yesterday’s story.

In the capital markets last week oil prices fell, stocks rose and bonds did nothing (more details at the end of this post). But the big news in the U.S. concerned the economy, specifically employment statistics. Continue reading

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