Data Source: Bloomberg

Second Quarter Highlights

  • Despite a poor June U.S. payroll release and United Kingdom choosing ‘Leave’ in the Brexit referendum, global equity markets posted a small but positive return for the quarter with MSCI All-Country World Index returning 1.0%.
  • Once again, the U.S. proved to be a safe haven as it led all major regions for the quarter; however, emerging markets proved to be a safer haven from Brexit as those markets returned 4.0% in June and maintained its 2016 leadership among major regions.
  • Other pro-cyclical risk assets such as U.S. high yield and commodities shrugged off Brexit and a poor May U.S. payroll release. Both asset classes outperformed equities for the quarter and remain well ahead so far this year. 
  • This quarter has produced a list of many (and contradictory) winners and few losers. Both paper and hard assets (precious metals) performed well. Energy stocks performed well alongside defensive, bond-proxy sectors such as utilities, telecom, and REITs. The main losers were Europe and Japan equities. Financials were also poor performers. 
  • The bond market seems less sanguine than equities; according to Fitch ratings, $11 trillion of global government bonds are now priced with negative yields. The 10-Year U.S. Treasury yield dropped to 1.47% while the 2-10 Year term structure flattened to below 1%. In the past, such sharp moves in safe-haven risk assets would have indicated deflationary concerns, but the strong performance of other risk-based assets is sending a contradictory signal. 
  • Investors will now shift their attention to the lengthy, drawn-out process of the U.K. negotiating its future “arrangement” with the rest of Europe. The concern is that investors will start to yank their U.K.-based investments causing a downward spiral of liquidity-driven selling and repricing. 
  • This summer will not see the resolution of issues overhanging the market such as the Brexit negotiations, the coming fall elections, and the U.S. earnings picture. On the bright side, there are some signs of a pick-up in appetite for capital spending and investing which may bolster the earnings outlook heading into the end of the year.

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