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Market Commentary

May 2018 Market Commentary: Is the Late Cycle Tiring Already?

Highlights:

• Global equity markets turned in mixed performance.  U.S. equities outperformed all other major regions while Europe and Emerging Markets came under pressure due to country/region-specific issues as well as ongoing trade war rhetoric and pressures from higher U.S. interest rates.
• Emerging markets have come under pressure due to a combination of country-specific turbulence in local markets (Argentina, Brazil, South Africa, Turkey) as well as concerns over the servicing of $400 billion in U.S. dollar denominated debt issued by emerging markets in the face of higher interest rates and a strong U.S. dollar. 
• European markets came under pressure, particularly the banking sector, driven by renewed concerns over the Eurozone periphery countries (Italy, Spain) as well as ongoing troubles surrounding Deutsche Bank. 
• The 10-Year Treasury Yield went on a wild ride in May having risen to 3.11% at mid-month before dropping as low as 2.78% following the rejection of the proposed Italian cabinet by the country’s president.  It ended the month at 2.89%.
• The Bloomberg/Barclays Aggregate Bond Index outperformed many risky fixed income sectors as credit risk failed to keep up with the safe haven bid for Treasuries.  The Bloomberg/Barclays High Yield Index was flat for the month while the Emerging Market Debt Index dropped ~5% in sympathy with the sell-off in emerging market equities. 
• Commodities maintained their YTD leadership among major asset classes with oil prices rallying to $72/barrel before falling back to $67/barrel following comments by Saudi and Russian oil officials suggesting that they would increase production. 
• Some key questions we’re sure are circling through your mind: Is the late cycle narrative starting to show its age already?  Have we reached the upper end of real interest rates that the global economy can sustain?  Will we soon see one final melt-up of speculative sentiment before the final meltdown?

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