William Riegel, Chief Investment Officer TIAA Public Investments
July 1, 2016
Europe’s broad STOXX 600 Index rebounded from a four-month low to finish up 3.2% (in local currency terms) for the week. Eurozone economic data was positive as well, with manufacturing growth hitting a six-month high in June, inflation returning to positive territory for the first time in four months, and unemployment touching a five-year low.
One trigger for the retracement has been the market’s realization that the U.K. still has options at its disposal to engineer an “exit from Brexit,” even though the odds still favor a full departure. These possibilities include the British Parliament overruling what is a legally non-binding result, holding a second referendum, or negotiating terms with the EU that largely preserve the status quo. Stocks also got a boost from the Bank of England’s hints of summer stimulus to offset the uncertainty and likely economic effects of the Brexit vote.
In the U.S., the S&P 500 Index was on pace for a gain of about 3.3%, nearly erasing all of its post-Brexit vote loss. Japanese and Chinese equities also rose sharply.
Current updates to the week’s market results are available here.
Despite the “risk-on” rally in equity markets as the week progressed, fixed-income investors remained cautious, boosting demand for safe-haven assets such as U.S. Treasuries. After starting the week at 1.57%, the yield on the bellwether 10-year note dipped to 1.46% as of early-afternoon trading on July 1. (Yield and price move in opposite directions.) With the world further awash in negative-yielding assets after the U.K’.s vote, Treasuries remain especially attractive.
Meanwhile, non-Treasury “spread” sectors broadly benefited from the ongoing search for yield. Investment-grade and high-yield corporate bonds outperformed for the week through June 30, elevating their year-to-date returns to 7.7% and 9.1%, respectively.
According to the government’s third and final estimate, U.S. GDP expanded at an annual rate of 1.1% in the first quarter, higher than the previous estimate of 0.8% and in line with our forecast. Stronger exports and business investment drove the upward revision, while personal consumption expenditures, disappointingly, were revised down to their slowest pace in two years. The good news is that consumption headed substantially higher in April and May, thanks to a pickup in first-quarter wages. As a result, we are raising our second-quarter GDP growth forecast from 2.5% to 3.1%. Continued consumption strength in June would further improve our outlook.
Among the week’s other data releases:
TIAA Global Asset Management provides investment advice and portfolio management services through Teachers Insurance and Annuity Association and affiliated registered investment advisors, including Teachers Advisors, Inc., TIAA-CREF Alternatives Advisors, LLC and Nuveen Asset management, LLC.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
Please note that equity and fixed income investing involve risk.
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