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Thursday, February 1, 2018

January 2018 - Monthly Market Commentary

January was a very strong month for global risk assets. Developed and emerging market equities were mostly higher, the USD weakened, the US yield curve steepened, the oil complex moved higher, and credit spreads tightened. While the Federal Reserve kept rates unchanged at their month end meeting and said that the path of increases would continue to be gradual, minutes from the December meeting indicated a potentially steeper path of future rate increases as a result of the US tax code overhaul. Congress confirmed Jerome Powell as the next Chairman of the Federal Reserve, who many believe will continue to raise rates at a slow and steady pace. The US job report showed that 148,000 non-farm jobs were added in December, the unemployment rate held at 4.1%, the labor force participation rate held at 62.7%, and average hourly earnings rose 2.5%.

Notable corporate transactions announced in January included the $7.7 billion merger of Dominion Energy and Scana, the $4.6 billion acquisition of Westinghouse by Brookfield, the $315 million purchase of Billabong by Boardriders, the $7 billion acquisition of Impact Biomedicines by Celgene, SS&C’s $5.4 billion purchase of DST Systems, Nestle’s $2.8 billion sale of its US confectionary business to Ferrero, the $3.5 billion purchase of Blackhawk Network by Silver Lake and P2 Capital, the $2 billion acquisition of Spectrum Brands by Energizer, Informa’s purchase of 65% of UBM for $5.3 billion, the $2 billion purchase of La Quinta by Wyndham, the acquisition of Bioverativ by Sanofi for $11.5 billion, the $5.6 billion purchase of Validus by AIG, Celgene’s $9 billion purchase of Juno Therapeutics, the $5.1 billion purchase of Patron Tequila by Bacardi, Lincoln Financial’s $3.3 billion acquisition of Liberty Life Assurance, the $415 million purchase of Asahi Fire & Marine by Rakuten, the $4.8 billion purchase of Ablynx by Sanofi, the $11 billion merger of Dr Pepper Snapple and Keurig Green Mountain, the $670 million purchase of Nuuvera by Aphria, the $852 million acquisition of CanniMed by Aurora Cannabis, the $4.9 billion purchase of KapStone Paper & Packaging by WestRock, the $6.1 billion acquisition of Xerox by Fujifilm, and the $20 billion purchase of a majority stake in the financial and risk business of Thomson Reuters.

Developed market equities were mostly higher in January (see page 8), with the largest gains in Italy (+7.4%), S&P 500 (+5.7%), and Spain (+5%); the worst performing were UK (-2%), Canada (-1.2%), and Australia (-0.6%). US small caps underperformed large caps, with the Russell 2000 up 2.6% and the Russell 1000 up 5.5% (see page 3). Consumer Discretionary (+9.3%), Information Technology (+7.6%), and Health Care (+6.6%) were the best performing sectors in January, while Utilities (-3.1%), Real Estate (-1.9%), and Telecom (+0.5%) were the worst performing (see page 2). Large cap growth (+7.1%) outperformed large cap value (+3.9%) in January (see page 3). Emerging market equities were higher in January (see page 9), with the biggest gains in China (+12.5%), Brazil (+11.5%), and Russia (+10.4%); Philippines (+1.4%), Indonesia (+1.6%), and Argentina (+2.2%) were the worst performing.

In currencies, the USD Index was down -3.2% in January (see page 10). The strongest currencies against the USD were the Norwegian Krone (+6.3%), British Pound (+5.0%), and Swiss Franc (+4.6%). Emerging market currencies were mostly stronger against the USD, with the biggest gains in the Mexican Peso (+5.7%), South African Rand (+4.9%), and Malaysian Ringgit (+4.1%). The Korean Won (-0.3%), Indian Rupee (+0.3%), and Turkish Lira (+1.3%) were the worst performing emerging market currencies.

The US Treasury yield curve steepened in January (see page 12). 10 year rates closed the month at 2.71%, up from 2.41% at December month end. Investment grade and high yield spreads tightened in January (see page 13).

In commodities, the GSCI index was up 3.4% in January (see page 11), with gains in Energy (+5%), Precious Metals (+2.2%), Agriculture (+1.5%), Industrial Metals (+0.1%), and losses in Livestock (-1.0%). Within individual commodities, Crude Oil (+7.4%), Platinum (+7.2%), and Wheat (+5.9%) saw the biggest gains, while Sugar (-12.6%), Lean Hogs (-3.6%), and Palladium (-3.4%) saw the biggest losses. Gold was up 2.3% for the month.

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