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Wednesday, August 1, 2018

July 2018 - Monthly Market Commentary

July was a fairly strong month for global risk assets. Developed and emerging market equities moved mostly higher, with value finally outperforming growth in the US, the USD index was flat, the US interest rate curve shifted higher, and credit spreads tightened. Minutes from the June Federal Reserve meeting showed that officials may seek to end an accommodative policy over the next year. In his Congressional testimony, Fed Chair Powell reaffirmed the rate hiking plan and stated that it was too soon to tell if recent trade disputes might change that plan. At its July meeting, the ECB left monetary policy and plans to end quantitative easing at year end unchanged. The Bank of Japan, meanwhile, indicated that it would continue its quantitative easing program for “an extended period of time”. Second quarter US GDP grew at a 4.1% annual rate, the strongest growth in almost four years. The US job report showed that 213,000 non-farm jobs were added in June (the 93rd consecutive month of job creation), the unemployment rate increased to 4%, the labor force participation rate rose to 62.9%, and average hourly earnings rose 2.7% from a year earlier.

Notable corporate transactions announced in July included the $22 billion deal whereby Dell Technologies will again become publicly traded via the acquisition of Dell tracker stock DVMT, the $3.7 billion sale by Enbridge of 19 natural gas gathering and processing plants to Brookfield, the $4.8 acquisition of Embraer’s commercial jet business by Boeing, the $1.2 billion purchase of Envirotainer by Cinven, the $1.5 billion acquisition of Camso by Michelin, Otsuka’s $430 million purchase of Visterra, the $5.6 billion acquisition of LifePoint Health by Apollo, the $2.6 billion acquisition of Charles River Development by State Street, the $4.2 billion purchase of Platform Specialty Products’ agrochemicals unit by UPL, Wren House’s $1.7 billion purchase of North Sea Midstream Partners, the $1.6 billion purchase of LCY Chemical by a consortium led by KKR, the $2.6 billion acquisition of Aleris by Novelis, the $2.6 billion purchase of Linxens by Tsinghua Unigroup, the $640 million purchase of Leumi Card by Warburg Pincus, BP’s purchase of shale assets from BHP Billiton for $10 billion, the $1.8 billion acquisition of various food businesses from SGA Food Group by US Foods, the $11.4 billion acquisition of Forest City by Brookfield, SS&C’s $1.5 billion purchase of Eze Software, the $2.9 billion purchase of Supervalu by United Natural Foods, the $1.7 billion purchase of a majority of Cetera Financial by Genstar Capital, the $5.5 billion merger of NCI Building Systems and Ply Gem, the $2.6 billion purchase of the Norwegian unit of TDC by Telia, the $1 billion purchase of US Security Associates by Allied Universal, the $800 million acquisition of Datorama by Salesforce, the $1.3 billion merger of Akebia Therapeutics and Keryx Biopharmaceuticals, the $1.8 billion purchase of Neovia by ADM, the $2.5 billion acquisition of Suse by EQT, and the $19 billion acquisition of CA Technologies by Broadcom.

Developed market equities moved higher in July (see page 8), with the largest gains in Germany (+4.1%), the S&P500 (+3.7%), and Spain (+3.6%). US large caps outperformed small caps, with the Russell 1000 up 3.5% and the Russell 2000 up 1.7% (see page 3). Industrials (+7.3%), Healthcare (+6.6%), and Financials (+5.3%) were the best performing sectors in July; Real Estate (+1.1%), Energy (+1.4%), and Consumer Discretionary (+1.8%) were the worst performing sectors (see page 2). Large cap growth (+2.9%) underperformed large cap value (+4%) in July (see page 3). Emerging market equities were mostly higher in July (see page 9), with the largest gains in Argentina (+14.1%), Brazil (+9.2%), and Thailand (+8.2%), and losses in China (-2.5%) and Korea (-1.2%).

In currencies, the USD Index was up 0.1% in July (see page 10). The Swedish Krona (+1.8%), Canadian Dollar (+1%), and New Zealand Dollar (0.7%) were the best performing against the USD, while the Japanese Yen (-1.1%), British Pound (-0.6%), and Norwegian Krone (-0.1%) moved lower. Emerging market currencies were mostly higher against the USD, with the largest gains in the Mexican Peso (+6.8%), South African Rand (+3.4%), and Brazilian Real (+3.2%).

US interest rates rose in July (see page 12). 10 year rates closed the month at 2.96%, up from 2.86% at June month end. Investment grade and high yield spreads tightened in July (see page 13).

In commodities, the GSCI index was down 3.5% in July (see page 11), with gains in Agriculture (+3.9%), and losses in Industrial Metals (-5.1%), Energy (-4.9%), Livestock (-4.1%), and Precious Metals (-2.5%). Within individual commodities, Wheat (+10.7%), Cotton (+6.9%), and Soybeans (+4.6%) saw the biggest gains, while Sugar (-13.7%), Lean Hogs (-13.5%), and Cocoa (-13.5%) saw the biggest losses. Gold was down 2.4% for the month.

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