MCF Weekly Capital Market Review - August 12th, 2019

Trade war tensions continued to take a toll on markets last week with equities finishing in the red, even more so for international equities. Gold continued its climb, breaking the $1,500-mark last week for a 1-year return of over 23% and reaching a 6-year high.[1] The 10-year Treasury rate ended last week at 1.74%, a far cry from 2.66% at the start of the year. The yield curve has fallen and flattened since the beginning of the year, with intermediate and long-term rates falling more than short-term rates. An inversion of the yield curve is a closely watched but imperfect harbinger of a coming recession. An inverted yield curve would require yields to decrease as maturity increases. The yield curve is only partially inverted (U-shaped), with rates inverted until hitting the 5-year maturity but not inverted for longer maturities.[2] 

Major geo-political news last week involved the devaluation of the Chinese Yuan. In the past, China has prevented its currency from devaluing past the symbolic level 7 Yuan per 1 US dollar. On Monday, the Yuan broke through this level. Trump quickly pounced on the news, directing Treasury Secretary Mnuchin to label China a currency manipulator[3] (another 2016 campaign promise[4]). China claimed the Yuan currency movements were the result of market, not monetary, forces, and has since responded to backstop the slide. This claim is dubious given its timing (after a round of proposed 10% tariffs) and given that China has no issue controlling Yuan values; the devaluation is likely a warning signal to the US of possible retaliatory responses. A sustained devaluation would stimulate exports to the US, providing a buffer against the effects of the trade war. But it is one tool that Chinese authorities explicitly stated will not be used to fight a trade war because it would be at the expense of the Yuan’s stability,[5] among other issues.

Indicators last week reflect muted inflation, strong labor markets, and a moderate growth economy. Despite the geo-political disruptions and headlines, economic fundamentals are not signaling a sustained slowdown. The US economy is slowing but still growing. There is concern about slowing global growth. The UK’s Q2 GDP was -0.2%,[6] but this is a country facing an identifiable idiosyncratic uncertainty known as “Brexit.” In July, the IMF raised growth expectations for developed markets (mostly the US) and lowered growth expectations for developing economies, and noted that downside risks dominate global growth expectations.[7]

This week’s top economic releases include CPI, retail sales, housing starts, consumer sentiment, and industrial production.

INDEX RETURNS

^{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.}