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Domestic equity prices were down only slightly last week, with roughly half the market posting fractional gains...



Weekly Market Overview | August 12, 2019

August 12, 2019
By Peter Sorrentino, Chief Investment Officer

Domestic Equity Overview:
Domestic equity prices were down only slightly last week, with roughly half the market posting fractional gains, while the bulk of the selling pressure was found in the Energy and Financial Service sectors. The decline in Energy stocks was roughly in line with the drop in the price of crude oil, driven by 10% declines among selected refiners and oilfield service providers. Among the Financial Services stocks, it was selling pressure on brokers, regional banks and asset managers that propelled the decline. In a combination defensive move and yield search, shares of Utilities rose 1.2% to lead the advancing stocks. The Materials sector was in second place with a 0.7% gain. With only the commodity chemical names not posting gains last week, precious metals miners and industrial gas manufacturers enjoyed particularly strong buying pressure. The weakness in Financials and Energy were enough to pull the value style (as measured by the Russell 1000® Value Index) down 1%, while the Russell 1000® Growth Index clawed its way to a positive 0.1%.

International Equity Overview:
Currency exchange rates continued to play an outsized role in foreign equity market performance. The MSCI EAFE® Index fell 2.25% last week on a 1.3% decline in the developed European markets combined with a 1.9% loss among most Asian markets. The specter of a debt crisis, whether it starts in Italy or China, now has begun creeping onto the list of investor worries. Now, it is the strength of the U.S. dollar that has the spotlight. Illustrative of this is the return on the Shanghai CSI 300 Index, where a 3% decline in local market terms became a 4.7% loss when converted to U.S. dollars. The impact of a strengthening U.S. dollar is evident in the 2.25% decline registered by the MSCI Emerging Market Index, as these economies struggle with the impact of slowing global growth and deteriorating terms of trade. Even the benefit of the lower oil price is being blunted by the rising dollar.

U.S. Fixed Income Overview:
Yields on U.S. Treasury obligations and Municipal bonds continued to retreat, declining 6 to 12 basis points along the maturity scale. Bucking that trend were corporate bonds, where $36 billion in new issuance pushed rates up slightly for investment grade issues. The high-yield corporate bond market experienced a notable shift up in yields, as the investors continued to exit the lower quality high-yield sector for Treasuries. July witnessed the heavy redemptions for both exchanged-traded and open-ended, high-yield funds.

Commodity Overview:
Commodity prices, ex-energy, enjoyed positive price trends led by silver and gold with 4.7% and 3.6% gains, respectively. Agriculture prices were positive for a third week in a row, as U.S. corn and soybeans picked up another 2.7%. Energy prices were again weaker, as the price for West Texas Intermediate Crude lost 2%, and the price for regular unleaded gasoline lost another 6% on falling demand and rising inventory levels. The major beneficiary, besides the U.S. consumer, of falling hydrocarbon prices has been the Materials sector, which relies upon crude and natural gas as a feedstock for much of its product – hence the sector’s advance since the end of May.

 

The prospect of a currency war severely rattled global markets, but the history of such policies generally reflects very badly on those who instigate and perpetuate such episodes. Currency markets have always been vast in scope. Wasting national treasure on the buying or selling of one’s currency has time and again proven to be fruitless, generally profiting only the speculators who understand the scope of the folly. Remember that it was currency speculators that George Soros and Jim Rogers rose to global fame breaking the Bank of England. As illustrated in Exhibit 1, China has done little to upend the stability of its currency. China is now part of the WTO and trying to wean itself off the U.S. dollar for its terms of trade. There would be no quicker way to lose friends and make enemies than to undermine their faith in the currency as a reliable storehouse of wealth.

 

Renminbi vs. U.S. Dollar

Exhibit 1 (Source: Bloomberg)

For a PDF version of this publication, click here: 08.12.2019_WeeklyMarketOverview

 

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