Newsletter August 2016
August 15, 2016 It might come as a surprise to investors that the S&P has just logged its fifth consecutive monthly rise. The index rose over 3.6% in July, its best performance since March, on the back of better than expected second quarter corporate earnings and an ebbing of fears of fallout from the BREXIT vote. But this apparent optimism sits strangely at odds with a deep uncertainty regarding the direction of the US economy (US GDP growth reported at the end of July week came in at an average pace of 1% for the first half of the year, half of the historic average, while the US Fed shied away from another rate rise and oil gave back much of its recent gains to close the month around $41 per barrel). One might say, with friends (markets) like these, who needs enemies?
It is apparent though that we may have reached a mid-summer lull in investor angst. Ongoing low yields (the $10 trillion of global government debt that was at negative yields in mid-July seems to have grown, whether by exaggeration or ) have driven a hunger for yield and Emerging Markets debt as well as US high yield and other fixed income has rallied. Equity market volatility remains close to its all-time lows, suggesting that liquidity remains constrained and that more cash may be waiting on the sidelines.
As we look ahead to August, the focus is likely to remain on Europe and the machinations behind a UK exit from the EU, as well as on the flailing Italian banks. The lack of a US rate rise impacted the USD, which fell against Emerging Markets currencies and is likely to bolster our unhedged currency exposures across our international equity exposure. Indeed in the first few weeks of August the euphoria that has been manifest in global fixed income markets intensified as long dated UK Gilts touched new lows in terms of yield and displayed extraordinary double digit year to date returns. This may have been the result of technical pressure – too few sellers to meet the Bank of England demand, but it certainly evidences some strong demand for low yielding paper and perceived quality.
The price of oil and other commodities will also be watched closely over coming weeks, as recent downward price momentum will come as a surprise to pundits who expected a period of stabilization. This may mean further pain for energy companies and, if recent behavior is any indication, weaker energy prices tend to correlate strongly with Emerging Market weakness.