Economic Update 2-09-2015

• It was a relatively busy week for several economic reports, including a lackluster but positive ISM number and an employment report that came in better than expected.

• U.S. equity markets rebounded strongly higher on the week with an easing in geopolitical concerns between the EU and Greece, stabilization in oil prices and end to a less-than-apocalyptic earnings season. Bonds suffered one of their worst weeks in some time with interest rates shooting higher.  Commodities also gained sharply on the back of oil’s gains.

U.S. stock markets rallied on Greek sentiment, good employment numbers and gains in crude oil prices.  Telecom and energy led the way, while utilities were the sole losing sector, down several percent.  This isn’t entirely surprising, as utilities valuations are a bit extended and a tick up in rates hurts their relative attractiveness versus other assets.

Foreign equities were also positive, but not as much so as were U.S. stocks.  The winners on the week were Greece and Russia, as well as nations like Norway that naturally benefit from oil price recovery.  Investors may have been surprised that Russia’s GDP actually grew at a 0.6% pace in 2014.

The Greek situation early in the week was focused on an ECB announcement that it was removing the waiver for Greek debt’s use as collateral in monetary policy operations, which was quite important to Greek banks.  This caused a plunge of Greek stocks, until the ECB refined the comment, that they’ve extended funding to local banks directly through their emergency lending authority, which brought Greek stocks back almost to where they started two days prior.  The situation there is a combination of practical and political.  The ECB is trying to walk the tightrope of protecting themselves yet also encouraging their larger agenda onto the new Greek leadership, while the new Greek leadership from the anti-austerity party is caught in a balance of tough talk for its home constituents, but also realizing the stark realities facing the nation if things go wrong with the EU.

China relaxed bank reserve ratio requirements by -0.5% from 20.0% to 19.5% last week to help provide additional stimulus—effectively injecting 600 billion Yuan into the economy—and boosting equity sentiment.  This is a tool in every central bank’s toolkit, but you don’t see it quite as often as direct rate guidance.

Interest rates ticked up by almost a quarter-percent, due to risk-on sentiment noted above that boosted equities.  This provided bonds with a terrible week and a taste of what rising rates can do to fixed income returns.  High yield led with strong gains, no doubt related to eased pressures on energy sector components.

In foreign bonds, the dollar fell a bit, but increased risk-on sentiment related to Greece provided a boost to the European periphery, including Italy.  European debt in general performed well on the news, providing positive performance to offset weakness in the U.S.  The dollar was not much of a factor on the week.

Real estate returns were mixed, with strong positive returns in Europe and Asia and a pullback in U.S. REITs—no doubt partially interest-rate related.

Commodities, as represented by the GSCI index, rose +5% on the week.  Those who blinked may have missed it, but crude oil has been on a reversal rally as of late—up +9% last week (biggest 1-week jump in three years) and almost +20% from lows a few weeks ago.  This has helped not only the commodities complex, but peripheral industries as well, not to mention high yield bonds and the like.  Gold and other precious metals fell by several percent, not helped by higher U.S. interest rates/real yields.

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.