Global Market Snapshot - September 2018
Key Market/Economic Observations
Revisiting our Strategic View on International Currency Exposure
Unlike domestic investments, foreign equity investments bring exposure to the underlying equity and the foreign currencies within which these companies transact. Recent dollar strength has only brought the foreign currency component of non-U.S. allocations into greater focus as international returns in dollars have outpaced those in local currency terms. However, with currency dynamics moderating, we believe this is an opportune time to return to our strategic view on currency hedging. Over the long term, currencies have a tendency to revert toward the mean, implying the incremental cost of hedging outweighs the benefits.
How the Markets Performed
U.S. Markets Remain Resilient; U.S. Consumers Shape Up
U.S. equity markets remain resilient despite the litany of troubling domestic political headlines, omnipresent trade war concerns with China, and worries of contagion effects from Turkey’s ongoing financial crisis. Domestic markets continue to benefit from a strong economic backdrop, historically robust earnings, and late-cycle fiscal stimulus. Additionally, upward revisions to personal income and a jump in the household saving rate over the month have strengthened U.S. consumer finances.
Flare-Ups in Italy Contrast with Stabilizing Eurozone Fundamentals
Eurozone economic growth continues to downshift, but fundamentals remain relatively strong. A moderation in net trade and lower consumer spending appear to be key reasons behind the slowdown from 2017 levels. However, critical areas of strength remain: Germany, the bloc’s largest economy, posted above-consensus second-quarter growth and consumer confidence surveys have remained elevated since President Donald Trump and European Commission President Jean-Claude Juncker announced the United States and Europe would “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.”
Crisis of Confidence in Turkey Takes Headline Risks off Tariff Skirmishes
The currency crisis in Turkey took the spotlight away from tariffs and trade. The Turkish lira has declined nearly 45% against the dollar this year, with most of that depreciation occurring in the second half of August. In our view, issues such as double-digit inflation, a steep current account deficit, and a central bank hesitant
to raise interest rates were magnified by sanction pressures from the United States. At about 1% of global GDP and 0.6% of the MSCI Emerging Markets index, we believe the current situation is a crisis of confidence in Turkish leadership rather than a symptom of renewed volatility throughout emerging markets.
BOJ Continues with Supportive Monetary Policy amid Subdued Inflation and Extreme Weather
The Bank of Japan (BOJ) announced a subtle shift in monetary policy in August. The central bank will now purchase government bonds in a “flexible manner” based on market conditions. For nearly two years, the BOJ has deployed yield curve control measures to keep the 10-year Japanese Government Bond (JGB) close
to 0%, with a band of plus or minus 10 basis points (bps). The recent decision from the BOJ increases that band to 20 bps; however we continue to believe such a move is far from supporting the bank’s long-term 2% inflation target. JGBs moved higher in anticipation of the change in monetary policy, only to fall throughout August as the news underwhelmed investors.
Crude Oil Moves Higher while Energy Stocks Diverge on Capital Spending Plans
Crude oil moved slightly higher during a volatile August despite increased risk around trade policy with China. Optimism surrounding a pact between the United States and Mexico on the North-American Free Trade Agreement (NAFTA) and higher-than- expected inventory declines spurred late-month gains. For context, U.S. crude exports to Mexico have risen 113% over the last five years, accounting for 13% of total U.S. crude oil exports, similar to that of Canada.
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Co-Chief Investment Strategists
Amanda E. Agati, CFA®
Jeffrey D. Mills
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