Volume 1 Issue 7, November
In November, the best performing equity markets were South Africa (+6.9%), Vietnam (+5.7%) and Hong Kong (+4.0%). The markets which posted the biggest losses were Qatar (-8.3%), Turkey (-9.4%) and Chile (-12.2%).
Global Fixed Income
Yields at the long end of the curve (ten year government bonds) dropped the most in Indonesia (-30bp), Pakistan (-27bp) and New Zealand (-21bp). Long-term yields rose the most in Argentina (+1.0%), Philippines (+76bp) and India (+58bp).
Americas As expected, the Federal Reserve at their November meeting held rates steady and left the target range for fed funds at 1.00%-1.25% but hinted that a rate hike remains likely at its December meeting. The Fed was relatively upbeat on the economy, noting stronger activity despite some disruptions from hurricanes and stating that core inflation is still not as high as they would like, though a subsequent reading would be closer to its target. The Fed also confirmed that it had begun the previously announced balance-sheet normalization program. US October core inflation rose at 1.8% y/y, approaching the Fed’s 2% target. US president Donald Trump nominated Jerome Powell to replace Janet Yellen as Federal Reserve Board chair. Tax reform cleared the House of Representatives and moved to the Senate. US official unemployment rate fell to 4.1%, a 16-year low, however wage growth has continued to disappoint. US consumer confidence rose to the highest levels since December 2000, driven by the rising equities and tight labor markets. With 90% of the members of the S&P 500 Index having reported for the third quarter, blended earnings grew 6% versus the same quarter a year ago. Stripping out insurance companies, which were hit by hurricane claims, earnings rose 8.3% and top-line revenues rose 5.8% year over year. US October wholesale prices rose at an annualized rate of 2.8%, the fastest in more than five years. The US retail sector also showed strength, with October retail sales increasing 0.2% m/m and September’s figure revised sharply upward to +1.9%. US Q3 GDP was revised higher to 3.3% from the earlier reported 3%. US manufacturing continued to expand in November, though at a slightly slower pace, with the ISM manufacturing PMI at 58.2 vs. October’s 58.7.
NAFTA negotiations, in which the US is seeking to change its terms within the agreement, ended without making any progress. Venezuelan president Nicolas Maduro said Thursday that his country will seek to restructure the nation’s outstanding debt. Maduro said state-owned oil giant Petroleos de Venezuela will make a delayed principal payment of $1.1 billion, effectively defaulting. Lebanon, Ukraine, Egypt and Pakistan have had the widest credit default spreads after Venezuela among emerging markets.
EMEA The November 2 Bank of England’s Monetary Policy Committee hiked its policy rate from 0.25% to 0.5%, the first increase in more than 10 years. The move was in reaction to a post-Brexit surge in inflation, largely due to a weak pound and resulting higher import prices. European stocks hit a ten-year high after eurozone third-quarter gross domestic product (GDP) growth surprised on the upside. Eurozone headline and core inflation missed expectations. Minutes of the last European Central Bank meeting revealed a split on keeping its bond buying open-ended. Germany’s Q3 GDP rose by a respectable 0.8%, while Italy’s economy grew by 0.5% in the same period. Negotiations to form a grand coalition in Germany, consisting of Chancellor Angela Merkel’s Christian Democratic Union (CDU), the Greens and the Free Democratic Party (FDP) broke down, leaving in the country in a state of near political-crisis. The situation could set the stage for new elections in early 2018. Brexit negotiations between the UK and the EU continued, with numbers of between GBP 40-55 billion being floated as a “divorce payment.” European manufacturing PMI rose to 60.1 in December, the highest reading since early 2000, and the second highest on record. Eurozone unemployment rate is now at 8.8%, the lowest level since January 2009.
Asia President Trump visited China this week as part of a multi-country visit to Asia. $250 billion in trade deals were agreed during US president Donald Trump’s visit to Beijing, though skeptics noted many of the announced deals were not contractual obligations and some may have been agreed to earlier. People’s Bank of China governor Zhou Xiaochuan warned again this week that his country’s financial system is becoming significantly more vulnerable because of high leverage. China’s 10 year yields rose above 4%, the highest level in some years. Japan’s manufacturing PMI hits its highest in four years. The US Commerce Department initiated an antidumping investigation against imported Chinese aluminium sheet. The move was seen as significant because it represents the first time in 32 years that the government has undertaken an investigation on its own without being prompted by complaints from industry, a signal that the Trump administration is following through on its promises to act tougher vis-à-vis the US’ trading partners.
WTI neared $60 a barrel and Brent oil prices hit two-year highs near $65 a barrel on Saudi Arabia and Venezuela concerns. Global real estate indices were roughly in line with developed equity markets, up around 2%. Industrial metals prices did not track oil and copper fell about 2%.
The top contributors for the equities portfolio were the US (+1.86%), Japan (+19bp) and Hong Kong (+5bp). The biggest detractors were Taiwan (-1bp) Denmark (-2bp) and Sweden (-4bp).The largest positive contributors for the bond portfolio were Indonesia (+4bp), Australia (+3bp) and France (+2bp), while the largest detractors were Turkey (-6bp), Brazil (-13bp) and India (-18bp).