• Data was mixed on the week, with retail sales disappointing, but surveys and sentiment still decent on the manufacturing/small business end.
• Equity markets deflected geopolitical concerns and gained, as did bond prices with interest rates falling a fraction of a percent to very low levels (even lower in Europe, which reported flat economic growth for the quarter.

Stocks experienced a positive week, as geopolitical concerns again faded into the background until later in the week.  From a sector standpoint, health care and technology shares gained several percentage points while energy and financials lagged—the former coupled with falling petroleum price trends.

Foreign markets experienced higher-profile news than in the U.S.  Other than a few outliers, the bulk of nations experienced positive returns, led by the European periphery, Brazil and India.  Prospects in those areas appeared a bit more promising than in core Europe and Japan, although returns among regions didn’t differ a great deal. 

European/German stocks have corrected sharply in recent weeks (falling -11%) as German GDP contracted -0.2% in the 2^nd quarter (-0.6% annualized) and France’s GDP stagnated, while nations like the Netherlands and Spain actually fared positively, but not enough to turn the ship around—bringing overall Eurozone growth to a flat result for the quarter.  Deterioration in outlook for German growth specifically (accounting for a large proportion of Europe’s economy), broader continental struggles staying ahead of deflation and Ukraine concerns certainly weighed on sentiment.  Hopes are high for the third quarter, though, as central bank stimulus policies, improving employment and continued low interest rates for borrowing continue to provide a needed tailwind.

Japanese real GDP for the 2^nd quarter was terrible (-1.7%, -6.8% annualized), as the imposition of a VAT tax hike reduced demand and/or contributed to pre-hike purchases in Q1.  But the result has largely been expected and equities have rebounded over the past several months.

U.S. bonds experienced a particularly strong week, with a reverse of the steepening that’s been happening recently, as rates fell up to 10 basis points in the mid to longer parts of the curve.  Municipals, an area we haven’t discussed in a while, has benefitted by a reduction in debt supply, with issuance 15% lower than last year.  While the budgets of certain state/local jurisdictions have improved along with economic recovery tax revenues and property tax payments, higher-profile headlines in Detroit and Puerto Rico have kept sentiment tempered.

High yield performed well again, in a recovery from losses in July—ETFs appear to be an increasing driver of performance, accounting for perhaps a fifth of asset class flows.  According to a few managers in the asset class we’re in contact with, this has contributed to volatility in an area where liquidity isn’t always as freely available as in investment-grade debt.

Outside the U.S. fixed income markets, the yield on the 10-year German Bond dropped below 1% for the first time, in line with announcements of negative GDP growth on the quarter.  Perhaps there is a bit of anchoring effect on global treasury yields from this slide downward, but effects are debated.

In real estate, European REITs led the way, followed by domestic industrial/office and retail, although all areas were in the positive.

Commodities lost ground a bit on the week, as gains in the grain sub-sector were offset by weakness in energy and metals.  Losses in energy and agriculture have been especially damaging to commodity returns since the end of the 2^nd quarter, in a reversal of prior trend, as waxing/waning tensions in Eastern Europe and the Middle East failed to keep oil supply fears elevated.  Crude oil prices have fallen -10% since mid-June—one of the possible reasons is an increasing supply glut.  As we’re producing more and more oil/gas locally (and efficiencies causing us to use less), it’s been argued that minor shocks may not have the same impact they once did.  But we may need a more severe crisis for this theory to be more robustly tested.

Moving to another segment, something interesting is also happening in the silver market, which will also have eventual implications for how other precious metals will be priced (such as gold, later this year).  For the last 120 years, prices were set by a unique negotiation between dealers (the price set this way has been known as ‘the fix’).  Last week, this format was replaced by an electronic one for silver, in light of accusations of manipulation, lack of regulation and demands for better transparency in several key world markets (think LIBOR a while back, where a basis point or two were allegedly purchased for a plate of day-old sushi), but litigation risk due to these old-world methods had been rising in many such ‘human’ markets for some time.

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.