William Riegel, Chief Investment Officer TIAA Investments
October 28, 2016
In the U.S., the S&P 500 Index fell about 0.7%. Despite an initially strong start to the third-quarter earnings season, results have become mixed, with the Industrials and Energy sectors delivering negative earnings growth, while Technology and Financials have outperformed.
Europe’s broad STOXX 600 Index lost ground after a solid gain the previous week, losing 1% (in local currency terms). On a positive note, the U.K.’s economy demonstrated unexpected resilience by expanding 0.5% in the quarter following the late June Brexit vote. Key Eurozone economic reports also outstripped forecasts. Preliminary data for the region’s manufacturing and services sectors surged in October to a 10-month high. An upturn in Germany, where business confidence reached its best level in 2½ years, drove the improvement. Importantly, Eurozone inflation appears to be picking up—welcome news for the European Central Bank, whose quantitative easing program has been aimed at jump-starting demand and higher prices.
Current updates to the week’s market results are available here.
In Europe, the yield on 10-year U.K. government debt hit its highest level (+1.26%) since Brexit. (Yield and price move in opposite directions.) Meanwhile, Germany’s 10-year bund, which briefly traded in negative territory as recently as October 24, jumped to 0.17% by Friday.The bellwether 10-year U.S. Treasury yield also climbed, touching 1.85% to end the week, 25 basis points (0.25%) above its October 1 level. This increase, along with markets now seeing about a 70%
chance that the Federal Reserve will raise rates in December (up from about 60% a month ago), has fueled a rise in the dollar.Returns for non-Treasury “spread sectors,” were broadly negative for the week through October 27, but in many cases marginally higher than Treasury returns. Overall, despite the past week’s rough price action, fixed-income markets held up relatively well, in no way duplicating the selloff that accompanied 2013’s “taper tantrum.”
Other economic reports included positive jobs and housing data, mixed in with disappointing consumer outlooks.
dollar’s recent advance could ease pressure on U.S. corporate earnings, while a decision by the Chinese government to end the yuan’s depreciation may help sidestep fears of capital flight and a slowdown in the world’s second-largest economy.
We caution, though, that our outlook is based on a number of factors coming to pass. These include slowing increases in sovereign bond yields and a modest rate hike by the Fed in December, accompanied by guidance confirming a gradual path of rate hikes. On the currency front, a halt in the
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
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