Investment Insights: Draghi trumps Yellen at Jackson Hole
This weekly report presents insights from our Global Investment Management team.
Markets opened half a percentage point lower yesterday as news broke that North Korea had fired yet another ballistic missile, this time over Japan; the S&P 500 Index recouped those earlier losses and ended the day up 0.09%. Tensions with North Korea have continued to escalate as the reclusive country tests more of its military arsenal, including three test launches over the weekend. Even China, North Korea’s sole ally, has joined the ranks of countries imposing far-reaching sanctions. President Trump declared, “All options are on the table” in response to the test, although it is becoming increasingly apparent that a show of force could spark intervention from China.
China will be hosting the 9th annual summit of the “BRICS” nations, which includes Brazil, Russia, India, China, and South Africa. The meeting is expected to promote increased cooperation within the emerging market economies, but also the rest of the world. The talks will likely focus on political security and economic collaboration. Meanwhile, German Chancellor Angela Merkel met with French President Emmanuel Macron to discuss increased integration of the European Union in an attempt to revitalize the region after Brexit. Among the topics, Merkel also endorsed the idea of a European Monetary Fund. The fund would replace the existing European Stability Mechanism and could provide a single economic department that would oversee the finances of the entire union.
Federal Reserve officials and central bankers from around the world met last week at their annual symposium in Jackson Hole, Wyoming, to discuss the future of monetary policy and the global economy. While most of the speeches were fairly ho-hum – even one orated by Fed Chair Janet Yellen about the benefits of increased financial regulation – investors’ focus may have ended up on her European counterpart. While the Fed has already begun its tightening phase in rates and has announced it will soon reduce its trillion dollar balance sheet, the European Central Bank has yet to start normalizing. ECB President Mario Draghi and his team face this tenuous task in the midst of economic data, like inflation and unemployment, which has lagged behind data domestically. Draghi may need to wait for some time in order to see an improvement in those metrics; meanwhile, the European economy becomes more dependent on accommodative policy.
Global stock markets have been moving sideways over the past month; the MSCI All Country World Index has moved less than a quarter of one percent during the time period. At the same time, the yield of the 10-year Treasury has steadily declined over the past two months and is currently hovering around 2.13%. Markets, along with investors, may be finally seeing the typical summer doldrums, or they may be in wait-and-see mode as geopolitical and monetary events loom ever closer. The Global Investment Management team continues to view the budget and tax reform debate, tensions in the Korean peninsula, and the unwinding of the Fed’s balance sheet as our key near-term risks. While these events may become opportunities, our posture in our strategies remains slightly defensive in the current investment environment.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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