Featured Market Outlook
Mid-Week Bond Update
The central bank and oil price supported global bond rally continued yet another week, this time leaving behind some Emerging Markets (EM), which suffered from a rising US dollar and political tensions in South Africa and Turkey. All eyes, however, are focused on Friday’s central banks’ gathering in Jackson Hole, Wyoming, where investors expect US Federal Reserve (Fed) chair Janet Yellen to shed some light on future policy actions. While some anticipate an interest rate hike later this year, on the back of an improvement in labour and wage data, others expect the Fed to focus even more on inflation – or the lack of it. This makes some investors question whether a hike is warranted at all. Different messages from Fed officials, some more cautious than others, have kept US rates at bay over the summer as investors wait for clearer signals.
Unconstrained bond investing:
Unconstrained strategies may be suitable in an environment where global growth is facing stronger headwinds, market volatility is on the rise, and challenging markets require greater flexibility. They have no formal benchmark and comprise exposures of various asset types that have differing risk budgets.
There continues to be value in credit
After a very challenging start of the year, the credit rally since mid-February, briefly interrupted by the Brexit rollercoaster, has been nothing short of remarkable. Despite healthy year-to-date returns, however, the rally has only taken valuations back to what we would consider attractive levels given our macro outlook and credit fundamentals.
Chuck Royce and Francis Gannon discuss why the combination of earnings and valuation could bolster small-cap value’s leadership in the current cycle.
Western Asset continues to be cautiously optimistic that global growth will hold up, but is cognizant that Brexit has introduced new uncertainties. Western’s central theme remains that favorable valuations, strong fundamentals and reasonable growth are a powerful backdrop for credit.
Mid-Week Bond Update
The post-Brexit risk rally continued for most Fixed Income asset classes over the past five trading days, but this time supported by a jump in oil prices, rather than central bank talk of further monetary easing. The technique was similar, though: officials from oil producing countries talked up the sector, highlighting the need to control the present supply glut. West Texas Intermediate surged to US$46.5 per barrel, up from $42.7 last week. Currencies of oil-exporting Emerging Markets (EMs) rallied, including the Colombian peso and the Norwegian krone.
Mid-Week Bond Update
Emerging Markets rallied over the past five trading days, supported by waning prospects of a US rate hike and a weakening US dollar. Expectations of higher US rates changed following a disappointing 1.2% second-quarter growth rate, which helped drag down the greenback against most developed market currencies. The US dollar, however, strengthened against commodity exporters such as Colombia, Russia and Mexico, as they suffered from the continuous slide of oil – the West Texas Intermediate (WTI) contract traded under US$40 per barrel for the first time since April. Japan experienced its worst bond sell-off in three years as investors fear the central bank can’t do more to reignite growth and inflation, following years and billions of yen in trying to do so. In Europe, banks suffered despite a generally positive regional Stress Test report on concerns that some institutions still need to raise capital. Europe’s inflation expectations fell.
The big picture in bonds:
With further accommodation from central banks likely, Western Asset CIO Ken Leech believes spread sectors should continue to offer attractive returns, with Treasuries and sovereign bonds underpinned by low rates.
Despite the economic pessimism now impacting valuations in global bonds, Brandywine Global's David Hoffman and Steve Smith perceive opportunity in developing markets in the 2nd half of 2016.
Mid-Week Bond Update
Further monetary easing or prospects of such in Europe and Japan lifted traditional risk assets over the past five trading days, especially Asian and European High Yield bonds. Japan unveiled yesterday a 28 trillion yen (US$265bn) stimulus package to bolster its ailing economy. The measures, however, fell short of some investors’ expectations of a so-called “helicopter money” policy, or the direct handing of cash to businesses and consumers. Global sovereign bonds underperformed their corporate peers, led by the US, where improving economic data pushed up expectations of a rate hike, sending Treasury prices lower.
Municipal bonds outperformed their taxable counterparts in the second quarter and Western Asset still has a somewhat optimistic outlook for the sector going forward.
There's much in the global economy that defies expectations; for ClearBridge co-CIO Hersh Cohen, the answer is to stay focused on solid assets with the potential for stable or rising dividends, as well as diminished volatility.
Fresh perspective on the UK/EU divorce:
Highlights from our June 29 London roundtable -- offering fresh perspective on the unfolding realities surrounding Britain's vote to leave the European Union.
Brexit's main economic risk may be to the British economy, but beware the potential knock-on effect of a stronger US dollar, notes Francis Scotland of Brandywine Global.
The UK has voted to leave the EU, a historic decision that will reshape and continue to send shocks through the market. Andrew Belshaw, Head of Investment Management, London, discusses the political and economic implications, as well as what this means for European bond markets and currencies, and the US and global markets.
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