WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
June 26, 2015
Global equities waxed and waned during the past week, as hopes for a resolution to the Greek debt crisis gave way to disappointment when negotiations stalled late in the week. The S&P 500 Index lost about 0.5% for the week, while European stocks rose. Overall, though, markets seem to be taking the Greek talks in stride, with fears of a “Grexit” giving way to headline fatigue.
In spite of a report showing that Japan’s manufacturing sector contracted in June, the Nikkei 225 Index rose almost 2.0%, hitting a more than 18-year high along the way. Although the yen has weakened versus the U.S. dollar this year, the Nikkei is up 15.1% year to date through June 26 in dollar terms. Japan’s advance has been supported by the government’s continued push for corporate governance reform.
The risk of an economic “hard landing” in China remains, even as its economy appears to be bottoming. Housing demand has picked up and the manufacturing sector, while contracting in June, has stabilized. Meanwhile, Chinese stocks—which have led global equity markets this year—plunged in the past week, with major indexes down about 20% from recent peaks, nearing bear market territory.
William Riegel, Chief Investment Officer, TIAA Investments
Solid U.S. economic reports pushed 10- and 30-year Treasury yields higher, while brief bouts of optimism around a Greek aid package dented demand for safe-haven assets. After beginning the week at 2.26%, the bellwether 10-year Treasury spiked to 2.48% on June 26.
Rising rates also hurt performance of U.S. spread products (higher-yielding, non-U.S. Treasury securities). Investment-grade bonds were especially hard hit amid continued outflows. In addition, liquidity became scarce as the quarter drew to a close, and the possibility of a near-term Fed rate hike fanned concerns for both broker-dealers and large asset managers about adding to their positions.
Yields on Eurozone sovereign debt remained well above the lows induced by the European Central Bank’s quantitative easing program, reflecting the region’s continued positive economic releases.
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For additional investment insights from TIAA Portfolio Manager Anupam Damani on the Greek crisis, view our Weekly Market Perspective Video.
Meanwhile, according to the government’s third and final estimate of first-quarter GDP growth, the U.S. economy shrank at a 0.2% annual rate in the first three months of the year, an improvement over the previous estimate of a 0.7% decline.
The past week brought additional evidence of the Eurozone’s recovery. The region’s manufacturing and service-sector activity improved in June to a four-year high of 54.1, according to Markit’s “flash” Eurozone PMI. The upturn was broad-based, with strong gains in employment and new orders. France, a latecomer to the recovery, notched its best month since August 2011. Additionally, the Citi Economic Surprise Index for Europe has been moving higher. This index is a gauge of the extent to which economic data releases have diverged from consensus forecasts.
On balance, U.S. stocks continue to be supported by a dovish Fed, who has made it clear that the pace of rate increases will be gradual regardless of the liftoff date.This measured approach could help contain long-term yields, making stocks relatively more attractive than bonds. On a cautionary note, past Fed tightening has introduced heightened market volatility. So while we maintain our year-end S&P 500 target of 2,300, the advance will likely be uneven.
European equity markets may soon get a reprieve from Greek uncertainty. Expectations are for an agreement to be reached without the disruptive effects of capital controls on Greece’s banking system. If the negotiations drag on, however, the fallout could trigger corrections that we would view as potential buying opportunities. Eurozone stocks, while not cheap, offer upside potential given their currently low profit margins, which are 20%-25% below normal. Meanwhile, improving Eurozone growth, coupled with a relatively dovish Fed, will weaken the dollar and strengthen the euro, creating a tailwind for U.S. investors.
We also expect continued volatility in fixed-income markets until the first Fed rate hike is announced and digested by investors. At that point, non-Treasury sectors could rally, underpinned by the Fed’s expected slow pace of rate increases and reasonable levels of fundamental risks (such as defaults).
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA). Past performance is no guarantee of future results.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
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