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Macroeconomic Market Report

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Eurozone:

  • European countries that are members of the European Union face economic and political uncertainty in the upcoming months as Brexit talks are beginning to ramp up again.

  • The United Kingdom’s Prime Minister, Theresa May, asserted that she would resign if the Brexit deal happens. 

  • This comes after UK lawmakers in parliament have twice refused her proposal for a deal that would disregard the Brexit vote and keep the UK in the European Union.

  • The European Central Bank has continued their dovish pivot and has refreshed their TLTRO program that offers long term loans to companies in the Eurozone in hopes that their current economic slowdown will be subdued.

China:

  • The United States and China are continuing trade talks however there have not yet been any clear signs of a resolution. 

    • There have been many positive news headlines that have indicated an impending resolution but so far there have been minimal results. 

    • The positive news headlines regarding trade talks have contributed to the recent rebound in the equity markets.

    • Both sides in the trade negotiations are seemingly having trouble giving up any ground on trade policy. 

Macroeconomic Review Regarding Our Portfolio:

  • Yield curve inversion may have an effect on our financial holdings (Bank of America & Goldman Sachs) because much of their business pertains to lending.  With the yield curve inverted the profit margins from lending may get squeezed. 

  • The continuing trade war may have adverse effects on our industrial holdings such as Standex International Corporation that manufactures metal goods.  However, in the event of a trade agreement the uncertainty around industrial holdings would be quelled. 

  • WTI crude oil is continuing its upward trend which will significantly help the profitability of our energy holdings such as Pioneer Natural Resources.

The Federal Reserve:

  • The Federal Reserve has continued their dovish outlook regarding interest rates and economic data. 

  • The Federal Reserve is monitoring economic data and will be making their policy decisions based on forthcoming economic data. 

  • Some investors believe that the Fed may even cut rates within the next year. 

United States:

Treasury Bond Yield Curve:

  • The U.S. Treasury bond yield curve has inverted and is kinked in between some maturity dates. 

    • Yield curve inversion occurs when the short-term yields on government debt are higher than the long-term yields.

    • A kinked yield curve occurs when one maturity has a higher yield than both an earlier and later maturity.  For example, the one month yield is 2.43%, the two month is 2.44%, and the three month is 2.40%

      • Yield curve inversion especially pertains to the financial sector as many banks borrow cash at short-term rates and use that capital to lend at long-term rates

The chart below shows the constant maturity rate of a 10-year treasury bond minus the 2-year bond.  As you can see, within the past few years the 10-year yield has been trending lower: 

The chart below shows the divergence between the 10 year treasury yield and the S&P 500 index:   This divergence has baffled some investors because the bond market appears to be pricing in a slowdown while the equity market shows signs of smooth sailing.

The chart below shows the divergence between the 10 year treasury yield and the S&P 500 index:

This divergence has baffled some investors because the bond market appears to be pricing in a slowdown while the equity market shows signs of smooth sailing.

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