July 7, 2017

Data Source: Bloomberg
  • Global equity markets turned in a positive quarter despite weakening towards the end of June.  Ex-U.S. markets led the U.S. market as global macro conditions continue to improve despite efforts by China to crackdown on ‘systematic risk’ within its financial system. 
  • Global fixed income had been benefiting from flattening yield curves and lower volatility before being surprised by hawkish comments from the European and Canadian central banks that resulted in a rise in global yields.  The 10-Year U.S. Treasury Yield had dropped to 2.14% before spiking to 2.30% at quarter-end.  The 10-Year German Bund Yield rose to 0.47% from a low of 0.25% and the French 10-Year rose to 0.82% from a low of 0.60%. 
  • One of the big stories of the quarter was oil prices crashing into another bear market before recovering at the end of the quarter.  U.S. NYMEX spot oil dropped to $43/barrel from $50/barrel at the beginning of the quarter before recovering to $46/barrel at quarter-end.  Energy investors were surprised by the surge in U.S. production as U.S. producers took advantage of the recovery in prices from earlier in the year. 
  • The U.S. dollar also weakened in the quarter and is now trading at levels prior to the November election.  The U.S. dollar is down 3.45% for the quarter and -6.44% for 2017, which helps explain a good portion of the outperformance of ex-U.S. markets versus the U.S.
  • The conflicting signals seen in equity, bond, and volatility markets imply that we are reaching an inflection point on the macro development front.  All seem to point to a slowdown but in varying degrees as very few see an inflationary-led cyclical growth spurt. 
  • Despite the peripatetic shift in forward growth expectations, U.S. consensus for 2017 GDP growth has remained 2.2-2.3% over the last two years.  The Federal Reserve of Atlanta’s GDPNow model is forecasting 2.7% annualized growth for 2Q (as of 6/30/17) which has steadily declined from the beginning of April. 
  • If we are not sliding towards another recession, then the markets are at least signaling an environment of low but scarce growth characterized by a search for yield while avoiding anything remotely cyclical (i.e. commodities).  The late quarter sell-off in precious metals also seems to confirm this outlook. 
  • Yet, the Federal Reserve has reaffirmed its commitment to its rate tightening schedule (three in 2017) as it seeks to normalize monetary policy by raising rates and reducing its balance sheet.  Fed official comments look towards a recovery in inflation as the recent drops have been driven by lower energy prices and one-offs such as mobile data plans.  
  • The so-called U.S.-driven cyclical trade (small cap risk, value risk, strong dollar) represented the consensus trade at the beginning of the year but the consensus trade has now shifted to a preference for low volatility and growth momentum.  This shift has just begun and will likely continue until the market sees further catalysts to resume cyclical economic growth.  

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