Weekly Update

Weekly Update

for Week Ending October 11th, 2019

Global Equities: For the second week in a row, early week volatility made way for a late week rally as news of positive developments from the China/US trade negotiations propelled global equity indices. Reports including a currency pact and agriculture sales in exchange for the non-implementation of upcoming tariffs have seemingly set the table for a more comprehensive deal when US representatives resume upcoming negotiations in China. The S&P 500 Index gained 0.66% on the week, as the Dow Jones Industrial Average and the Nasdaq Composite Index rose 0.93% each. International equities outperformed also for the second consecutive week, as the international developed markets proxy iShares MSCI EAFE Index ETF (EFA) rose 2.15%, while emerging markets and the iShares MSCI Emerging Markets ETF (EEM) rallied 1.86% on the week.

Fixed Income: The equity market strength came at the expense of investment grade bond market, as the yield on 10-year US Treasury Note rose quite dramatically to 1.76% from the prior week finish near 1.52%. This was driven by the optimism surrounding a potential trade deal and the lack of dovishness from the Federal Reserve meeting minutes signal of limited easing in the future. High yield bonds benefitted from the general risk-on move, as the iShares Iboxx High Yield Corporate Bond ETF (HYG) rose 0.39% on the week. The high yield rally came after the latest report from Lipper for the week ended 10/9, that saw large outflows of $1.5 billion.

Commodities: A sleepy start to the week in the energy space gave way to a large late-week jump in oil prices. The global risk-on attitude alone was enough to boost prices, however, another Iranian oil tanker was struck by missiles off of the coast of Saudi Arabia which again increased tension in the volatile and important region. The West Texas Intermediate (WTI) crude oil benchmark jumped to nearly $55 per barrel after beginning the week near $53, as the International Brent crude oil benchmark rose similarly to above $60.50 per barrel.


Future Rate Cuts Uncertain: The minutes from the most recent Federal Reserve Open Market Committee (FOMC) meeting, where the decision was made for another .25% cut to the Federal Funds rate, reiterated the uncertain nature of further rate cuts. It showed that some members were concerned that market expectations for future cuts were overdone, and wanted additional communication included in the statement on when the cuts would cease. Most of the committee members were in favor of the cut, while a few were in favor of an increased .50% cut to thwart slowing employment growth and weakening business investment. The meeting minutes release combined with positive developments regarding the China/US trade negotiations to lower the chances of multiple Fed Funds rate cuts this year from 47% to 21%, per the CME Group.

Inflation Measures Subdued: Measures for the Consumer Price Index (CPI) came in at the low end of estimates for September, with the headline measure flat on a month-on-month basis and up 1.7% versus a year ago. The Core measure, which excludes food and energy, rose .1% for the month versus consensus estimates for .2%, as vehicle and apparel prices fell. Shelter prices, medical care, and car insurance rose during the measurement period. Inflation at the producer level, as measured by the Producer Price Index (PPI) and the Core (less food & energy) measure, surprisingly both slipped -.3% during the month versus consensus estimates for a .1% rise. Overall services and trade services prices fell on a monthly basis, joining goods prices which have fallen in the prior two readings.

Don’t Call it QE: Persistent liquidity issues in short-term inter-bank lending markets that use repurchase agreements, or “repos”, has led to the Federal Reserve announcing that it will continue to add liquidity in the repo market, as necessary, until January. In addition, beginning on October 16th, they will purchase $60 billion of US Treasury bills per month until the 2nd quarter of 2020 to boost bank reserves to a level where short-term bank liquidity needs are sufficiently met. Fed representatives have insisted that this is not the beginning of new quantitative easing, or QE4, and is just a structural adjustment. However, this is effectively funding the US fiscal deficit that is issuing a record amount of US Treasuries and will increase the near $4T Fed balance sheet.


The Chart of the Week shows a 2-year chart of the iShares MSCI Emerging Markets ETF (EEM), representing the performance of emerging market equities. Optimism surrounding the possibility for a trade “mini-deal” between the US and China has propelled EEM above its 200-day moving average (red line), however, it will likely take more substantial progress on a complete solution in order to break out from the falling trend from the early 2018 high (thick black line). We currently have no tactical exposure to emerging market equities, though they remain a strategic holding in appropriate Hanlon Strategic and All-Weather Models.

Chart courtesy of StockCharts.com. Commentary, and opinions are those of Hanlon Investment Management.


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