MCF Capital Markets Update - August 15th, 2019
Tuesday’s rally was the result of a partial Trump reprieve, announcing that some Chinese products targeted in the latest round of tariffs would be excluded or delayed until December 15. Negotiators from both sides agreed to talk in two weeks.[1] The positive news quickly lost steam Wednesday due to a slew of economic data. The market selloff Wednesday was primarily a reaction to concerns of slowing global growth.
In Asia, direct consequences of the US-China trade war continue to dent Chinese growth prospects. Bank lending, factory surveys, industrial output, infrastructure and property investment, and retail sales all showed weaker-than-expected results.[2] Indirect consequences of the US-China trade war are also beginning to appear. Singapore’s Q2 GDP growth sharply contracted 3.3% and projections were slashed to nearly flat through end of year.[3] China is the world’s second largest economy by GDP[4] and the concern for market participants is a contagion of contraction to surrounding regions and trade partners that could lead to a global recession.
Europe’s already struggling economies are facing not only a slowing of growth but an actual contraction. Germany and the UK are Europe’s first and second largest economies by GDP, respectively. In addition to the UK last week reporting -0.4% GDP growth for Q2, Germany reported growth at -0.1%,[5] citing a decline in exports. Another quarter of negative GDP growth would officially place both into recession. In July, ECB (European Central Bank) President Draghi stated that monetary stimulus is necessary to “support the euro area expansion,”[6] reminiscent of comments made by Fed Chair Powell about the US.
To top off recession fears, the prominent 2-year/10-year Treasury yields are now inverted as yields continued to slide. This measure is a traditional omen of recession, but investors should interpret with healthy skepticism. Inversions have occurred that were not followed by a recessionary period. Many possible causes influence Treasury yields. For example, over 47% of global debt excluding the US is negative yielding.[7] Foreign investors looking to earn a positive return on bonds can purchase positive yield through US Treasuries. As more foreign buyers purchase US Treasuries, US yields fall. This current situation is a fundamental contrast to pre-2014 periods, when there were little to no negative yield bonds globally. Comparing the current inversion with past inversions merits attention to shifts in the financial environment affecting the US yield curve and consequent interpretations.
Even if the recent inversion is a true recessionary signal, equity markets typically take several months (sometimes more than a year) to enter recession. Yield inversion is one among several other signals and should not be solely relied upon by investors for making investment decisions. Other US fundamentals are yet to scream recession. We’ve faced late-cycle, recessionary fears the past few years yet few would have accurately predicted the continuing bull run reaching 10 years of age earlier this year. Current conditions warrant caution, but do not necessarily indicate economic doom.
[1] https://www.cnbc.com/2019/08/13/ustr-removes-some-items-from-list-of-new-china-tariffs-citing-health-safety-national-security.html
[2] https://www.reuters.com/article/us-china-economy-activity/chinas-economy-worsens-in-july-industrial-growth-at-17-year-low-as-trade-war-escalates-idUSKCN1V404X
[3] https://www.reuters.com/article/us-singapore-economy-gdp/singapore-slashes-2019-gdp-forecast-as-global-risks-expand-idUSKCN1V301G
[6] https://www.reuters.com/article/us-ecb-policy-highlights/draghi-comments-at-ecb-press-conference-idUSKCN1UK1TM
[7] Bloomberg, LLP
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from MCF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MCF is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the MCF’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an MCF client, please remember to contact MCF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please click here to review our full disclosure.
REFLECTED INDICES
S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the US market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.
MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,859 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. Investors cannot invest in an index.
Bloomberg Barclays Global Aggregate ex-USD Index is a measure of global investment grade debt from 24 local currency markets. This multi- currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Investors cannot invest in an index.
Bloomberg Barclays High Yield Corporate Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Investors cannot invest in an index.
S&P GSCI is a composite index of commodity sector returns which represents a broadly diversified, unleveraged, long-only position in commodity futures. The S&P GSCI is intended to provide exposure to broad-based commodities. Investors cannot invest in an index.
Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed- rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- through), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. Investors cannot invest in an index.
Bloomberg Barclays 1-10 Year US Government Inflation-Linked Bond Index tracks the 1-10-year inflation protected sector of the United States Treasury market. Investors cannot invest in an index.
Bloomberg Barclays US Treasury 1-3 Year Index measures the performance of public obligations of the US Treasury with maturities of 1-3 years, including securities roll up to the US Aggregate, US Universal, and Global Aggregate Indices. Investors cannot invest in an index.
Bloomberg Barclays US Treasury Bellwethers 3 Month Index is an unmanaged index representing the on-the-run (most recently auctioned) US Treasury bill with 3 months’ maturity. Investors cannot invest in an index.