January 2016 - Monthly Market Commentary
January was a difficult month for global risk assets. Developed and emerging market equities were mostly lower, in many countries sharply so, the US Dollar strengthened, the oil complex was sharply lower while other commodities were mixed, credit spreads widened, and US interest rates tightened except at the very short end of the curve. At its January meeting, the Federal Reserve made no change to interest rates and indicated that they are monitoring recent economic and financial market weakness, leading many to conclude that the pace of future interest rate increases will slow. At month end, the US GDP report showed that the US economy grew at only a 0.7% annualized rate in the fourth quarter and 2.4% for 2015. Also at month end came an unexpected move from the Bank of Japan, which introduced negative interest rates for the first time. The US job report showed 292,000 jobs were added in December (bringing 2015 new jobs to 2.7 million), while the unemployment rate was unchanged at 5.0% and the labor force participation rate ticked slightly higher to 62.6%.
Notable corporate transactions announced in January included the $32 billion acquisition of Baxalta by Shire, Haier’s $5.4 billion purchase of the GE’s appliance business, Suncor’s $2.9 billion acquisition of Canadian Oil Sands, IBM’s purchase of Ustream and Resource/Ammirati (terms undisclosed), the merger of the Redwood Group and e-Shang, two Asian based real estate firms, the $585 million acquisition of Clarion by Legg Mason, the $14 billion merger of Johnson Controls and Tyco International, AIG’s reorganization and spin-off of its mortgage insurance unit and sale of its financial advisory business, the purchase of FirstMerit by Huntingon Bancshares for $3.4 billion, and the split by Xerox into two publicly traded companies.
Developed market equity markets were lower in January (see page 8) as Italy (-13.2%), Hong Kong (-8.9%), and Germany (-8.6%) had the biggest losses. US small caps underperformed, with the Russell 2000 down 8.8% and the S&P500 down 5% (see page 2). Telecom (+6.8%), Utilities (+4.9%), and Consumer Staples (+0.6%), were the best performing sectors in January, while Materials (-10.6%), Financials (-8.9%), and Healthcare (-7.6%) were the worst performing (see page 2). Large cap growth (-5.6%) underperformed large cap value (-5.2%) in January (see page 3). Emerging Market equities were mostly lower in January (see page 9), with the biggest gains in Argentina (+3.6%), Thailand (+3.4%), and Russia (+1.7%); China (-12.4%), Brazil (-5.8%), and India (-4.5%) were the worst performing.
In currencies, the USD Index strengthened 1% in January (see page 10). The weakest developed market currencies against the USD were the New Zealand Dollar (-5.1%), British Pound (-3.3%), and Australian Dollar (-2.8%), while the Norwegian Krone (+1.9%) strengthened against the USD. The USD was stronger against most emerging market currencies with the biggest gains seen against the Mexican Peso (-5%), Russian Ruble (-3.6%), and South African Rand (-2.6%); the Malaysian Ringgit (+3.9%), Indonesian Rupiah (+1.4%), and Thai Baht (+0.9%) strengthened against the USD (see page 10).
The US Treasury yield curve flattened in January (see page 12) as short term rates rose and long term rates fell. 10 year rates closed the month at 1.94%, down from 2.27% at December month end. Investment grade and high yield credit spreads widened in January (see page 13).
In commodities, the GSCI index was down 5.2% in January (see page 11), with losses in Energy (-9.2%), Industrial Metals (-1.6%), and Agriculture (-1%); gains were seen in Precious Metals (+5.1%) and Livestock was flat. Within individual commodities, Lean Hogs (+8.5%), Gold (+5.3%), and Corn (+3.7%) saw the biggest gains, while Cocoa (-14%), Sugar (-13.8%), and Gasoline (-13.1%) saw the biggest losses; Gold was up 5.3%.
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