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MCF Weekly Capital Market Review - September 16th, 2019

Geo-political events recently escalated in the Middle East with a drone attack on a Saudi Arabian (Aramco) oil facility over the weekend. Brent Crude oil jumped 10% over the weekend due to the expected disruption. Houthi rebels from Yemen, supported by Iran, have claimed responsibility for the attack. Secretary of State Pompeo places blame solely on Iran; the Saudi government has yet to determine responsibility.[1] The full impact to world oil production is still unknown but the primary concern for markets would be the risk of further escalation between the top five oil producers and OPEC neighbors.

Trump toned down his combative trade rhetoric, instead letting tariffs do the talking. Senior White House adviser Peter Navarro says that tariffs are the best defense and insurance policy for good faith trade negotiations, and are “working beautifully.”[2] China extended an olive branch last week, exempting a small list of US imports from additional tariffs for one year.[3] Trump then delayed a 5% tariff increase from October 1 to October 15.[4] Both are token gestures of concession. Trade talks between teams are scheduled for mid-September. Another escalation could happen before then and a resolution is not expected anytime soon. Equity markets have taken notice of the calmer trade rhetoric from both sides, steadily climbing over the past week.

The European Central Bank (ECB) announced monthly asset purchases of €20 billion (~$22B) and pushed the deposit facility rate further negative to -0.5% (banks must pay the ECB to hold bank deposits there).[5] The Fed is lockstep with the ECB on looser policy, both making comments to achieve the 2% inflation target at all costs, with negative interest rates possible. Unlike the Fed who framed its most recent rate cut as a “mid-cycle adjustment,” the ECB flatly admits a highly accommodative stance “for a prolonged period of time.” Market participants expect the Fed to follow.

The overarching theme is that slowing global growth is forcing central banks to respond. The ECB 2019 GDP projection for the Euro area is only 1.1%; Germany and the UK contracted last quarter. China’s slowing economy surprised many, triggering the August 14 selloff. Latin America is expected to grow an anemic 0.6% this year.[6] US bond markets were much quicker than central banks, picking up on stalled global growth as early as October of last year, with Treasury yields steadily falling across the curve as investors shifted to safe-haven assets. The 10-year yield hovered in the 3.1% range in October but dropped precipitously, falling as low as 1.47% at the beginning of this month (Friday’s close was back up to 1.9%).[7] Recession risks have increased but a recession in the near future is not a forgone conclusion; most economies are still growing, just at a lower rate.

Looking at economic indicators, the JOLTS report was mixed with a drop in the number of job openings but a pickup in job quits. Jobless claims have also held steady, an indication of a strong and stable labor market. PPI is showing signs of a pickup in inflation. Retail sales beat expectations and consumer sentiment made a modest rebound despite the recent trade tensions.[8]

None of these indicators are likely to change the likelihood (~80% chance[9]) for the Fed’s expected 25 basis point cut at their meeting this Wednesday. This week will also see reports on manufacturing, industrial production, and housing.

INDEX RETURNS


[9] https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

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.