- In a slow week for economic data, stats like retail sales were weaker, but PPI also came in flat, which appeared to temper core inflation concerns from prior weeks.
- Equity markets were largely off, due to increased concerns about violence and possible military action in Iraq and skepticism about European stimulus.
Stocks fell on the week, with small-caps losing a bit less than large-caps. Industry results were led by energy and technology, while consumer discretionary and industrials lagged. This came alongside increased tensions in Iraq as rebels took control of two key Northern cities. Obviously, the ramifications are in the spectrum of: What will be the U.S. involvement if any (undecided, but seems likely at some level)? What will it do to energy costs (a bit higher so far, and intensification of violence would pressure the per barrel price of crude upward)? Will it spread regionally (the wildcard and biggest fear in that part of the world for most investors)? If oil prices do rise for an extended period, how much of a negative impact will that have on consumer behavior/spending?
There were also several mergers/acquisitions during the week, involving Tyson Foods/Hillshire Brands, as well as Merck and Priceline buying what are hoped to be complimentary business lines. The prices paid in a few cases appear to be at significant premiums to fair value/current market, which signifies optimism for both the prospects of the target firm and/or the underlying economy’s ability to support these prospects.
In foreign markets, Japan gained slightly, while the U.K. and Europe each lost up to a percent. European stocks have tended to experience mixed/less outright positive reactions than U.S. issues in response to more accommodative measures. Emerging markets were the best-performing equity group, with positive gains on net. Brazil was sharply higher, in keeping with World Cup excitement, as was China, where industrial output and retail sales rose. From a regional contrast standpoint, China has been accelerating government spending to boost economic growth, while Japan decided against additional stimulus. We’ve certainly seen a divergence in central bank and government monetary (both stimulus and interest rate) policies in the last several months as conditions have diverged, and we would expect such a pattern to continue. Normally, policies move a bit more in unison during times of general crisis, and slowly diverge as conditions moderate, normalize and improve, as the degree of improvement generally varies by region—the U.S. and U.K. certainly seem to be a bit ahead of Europe.
Bonds were little changed on the week (BarCap Agg was flat), despite the Iraq headline fears, with short bonds a few ticks higher on the yield curve, and long bonds a few lower, so you could say the overall curve flattened somewhat. Long treasuries naturally gained, as did high yield bonds by a fraction of a percent. A recent treasury auction of short-term notes was fairly strong, with higher demand, but long-term notes seemed a bit weaker—especially from primary dealer sources—at current low rates. Outside the U.S., Canadian and Australian bonds gained while emerging market bond indexes lost ground on the week.
Commodities were largely higher this week, led by higher crude oil prices driven by new strife in Iraq—a prime oil-producing region—although the key drilling regions are to the southeast of the affected cities. Naturally, any geopolitical activity that threatens potential production is going to have an impact on pricing. Gold and silver were also higher on the global uncertainty. Nickel prices corrected by a few percent, due what’s perceived to be a possible overshoot, as did grain prices with USDA reports indicating current growing conditions as quite strong.
|Period ending 6/13/2014||1 Week (%)||YTD (%)|
|BarCap U.S. Aggregate||0.00||3.34|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.