MCF Weekly Capital Market Review - September 30th, 2019
Equity markets have been adrift for the past couple weeks. All major equity indices were slightly down last week and the only real winners have been high quality bonds. There isn’t a single event or social media posts by Trump causing this drift, but rather the lack of positive developments on multiple fronts, such as the US-China trade war and Brexit, which continue to mount uncertainties. In the meantime, the prospects of slowing global growth are still intact and weighing on economic outlook.
Trump is however grabbing headlines as House Democrats open an impeachment inquiry over whistleblower allegations seeking help from Ukrainian President Zelendsky to investigate a political rival, presidential contender Joe Biden, in exchange for foreign aid. An impeachment would create a huge shift in major policies, assuming a Pence presidency. The process is only an inquiry right now; Speaker Pelosi would still have to bring an impeachment vote to pass in the House, only to be sent to a Republican majority Senate where it would need a 2/3 majority. Politics aside, the odds of Trump leaving office before his first term expires now sit at ~20%. For comparison, this number was over 55% in August 2017 shortly after the Mueller investigation began and was below 10% in August 2019 before the whistleblower allegations.
Prorogation (suspension of parliament) by UK Prime Minister Boris Johnson was dealt a large blow last week. The Supreme Court ruled that the prorogation was unlawful and as a result, its effect is null and void. Parliament was to be suspended from September 12 to October 14, but instead continued Wednesday. The current Brexit deadline is October 31 and the only Brexit issue that UK lawmakers have agreed upon is leaving the EU if and only if there is some sort of negotiated deal with the EU beforehand. A deal able to corral enough members into a majority has eluded parliament due to the wide spectrum of opinions, ranging from a complete break with the EU to a complete reversal of the referendum. Brexit continues to provide more and more uncertainty than closure as time passes.
The drone strikes on Saudi Aramco caused less damage than expected. Repairs back to full capacity are expected to be complete this week. Saudi oil reserves were released in the meantime to allow oil exports to continue uninterrupted. Powers in the area continue to point fingers but there is no conclusive evidence of responsibility and Saudi Arabia has so far chosen diplomacy rather than war. The price of oil has since fallen steadily, close to its pre-attack levels.
Consumer confidence fell this month in contrast to the strength shown from July and August. Last week, the durable goods report reflects the US weakness in manufacturing for the past year. New home sales notched higher and reached its highest three-month average since 2007. GDP estimates for last quarter remained at 2%.
This week will see PMI and ISM manufacturing reports, construction spending, employment reports, and a barrage of Fed member speeches throughout the week.
IMPORTANT DISCLOSURE INFORMATION
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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.