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MCF Weekly Capital Market Review - June 4th, 2019

Trade wars now seem to be a standard negotiating tactic for foreign policy. While the dispute with China remains unresolved, Trump now is targeting Mexico with an initial 5% tariff on all imports to the US The tariffs are slated to start June 10 with planned increases of 5% per month until reaching a 25% level. Two reasons for the new tariff threat are leverage in renegotiating the North American Free Trade Agreement (NAFTA) and a deterrent for the illegal immigration problem; both were signature Trump 2016 campaign promises that remain unfulfilled. It’s no coincidence that the announcement was made on the same day Trump’s renegotiated NAFTA was presented to Congress. The proposed tariffs have a chance of being revoked if Mexico cooperates enough on these two issues[1]. As the 2020 presidential campaign approaches, Trump’s latest actions leave one with the impression that he means to fulfill these 2016 campaign promises.

The US has more bargaining power in both disputes due to the lopsided trade balance: the US imports more from both countries than it exports. The US-Mexico dispute is different for several reasons. Notably, ~75% of Mexican exports were to the US compared to Chinese exports of ~20% in 2018[2]. Furthermore, exports comprised ~28% of Mexico’s GDP compared to ~4% of China’s GDP for the same year[3], [4]. Tariffs have a higher economic impact on Mexico which may lead to a quicker resolution than the US-China dispute. However, political concerns may overshadow economic concerns in the negotiating process.

The S&P 500 spent the last week in a downward trend due to uncertainty of outcomes surrounding the aforementioned trade disputes. Ironically, emerging markets equities (MSCI EMI) were positive last week, although this likely is merely making up for some lost ground as it remains the worst performer QTD and YTD among other broad equity indices. Intermediate and long-term Treasury yields also came down with a 10-year yield of 2.14% at month’s end, further compressing yields (smaller difference between short-term and long-term yields)[5]. Oil (West Texas Intermediate) reached a low of $52.14, falling from its recent high of $63.81 on May 20, a drop of over 18% in just two weeks[6]. From the fundamental side of the economy, the second estimate of real GDP for Q1 came in at 3.1%, slightly above the 3.0% consensus. Other indicators are showing signs of a pickup in inflation and strong labor markets[7].

This week has plenty of economic data releases to keep investors busy: PMI and ISM Manufacturing on Monday; Vehicle Sales and Factory Orders on Tuesday (Chairman Powell also speaks at the Conference on Monetary Policy Strategy on Tuesday); ADP Employment, ISM Non-Manufacturing, and the Beige Book on Wednesday; Trade, Jobless Claims, and Productivity on Thursday; and Employment Situation on Friday.


Index Returns



[3] “World Economic Outlook Database”. International Monetary Fund

[4] https://www.thebalance.com/u-s-imports-by-year-and-by-country-3306259 

[5] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yield

[6] https://www.investing.com/commodities/crude-oil-historical-data

[7] https://us.econoday.com/


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 a 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.