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CurAlea Associates LLC is an independent risk and due diligence advisory firm focused on hedge funds and family offices.

Monday, July 1, 2019

June 2019 - Monthly Market Commentary

June brought a sharp rebound in global risk assets, with US equities reaching fresh all-time highs as global trade tensions cooled somewhat during the month. Global equities rose sharply, credit spreads tightened, the US dollar weakened, and the oil complex rallied; US Treasury yields moved lower, particularly at the short end of the curve, and gold rallied to six year highs, as several major central banks took a more dovish tone during the month. At its June meeting, the Federal Reserve made no change to interest rates, but indicated that “the case for somewhat more accommodative policy has strengthened”. The Bank of Japan indicated that if economic growth slows, it would “consider expanding stimulus without hesitation”, the European Central Bank indicated that “additional stimulus will be required” in the Eurozone if the outlook doesn’t improve, and the Reserve Bank of Australia cut rates for the first time in three years; the Bank of England held rates and guidance unchanged. Citing global trade tensions, the World Bank lowered its global growth forecast to 2.6% from 2.9%, and cut its forecast for global trade growth to 2.6% from 3.6%. Despite global trade issues, the US service sector expanded, as the June ISM non-manufacturing index rose to 56.9 in May from 55.5 in April. US retail sales rose 0.5% in May, an increase from April’s 0.3%, though consumer confidence declined from 100 in May, to 97.9 in June. China’s imports dropped a sharper than expected 8.5% in May, after rising in April, and exports to the US fell 4.2%. The US jobs report showed that 75,000 jobs were added in May (the 104th consecutive month of job creation), the unemployment rate held at 3.6% (a 50 year low), the labor force participation rate held at 62.8%, and average hourly earnings rose 3.1% from a year earlier.

Developed market equities rose in June (see page 8), with the biggest gains in Italy (+7.2%), the S&P 500 (+7%), and Hong Kong (+6.7%). US small caps slightly outperformed large caps, with the Russell 2000 up 7.1% and the Russell 1000 up 7% (see page 3). Materials (+11.7%), Energy (+9.3%), and IT (+9.1%) were the best performing sectors in June; Real Estate (+1.8%), Utilities (+3.3%), and Communication Services (+4.3%) were the worst performing sectors (see page 2). Large cap value (+7.2%) outperformed large cap growth (+6.9%) in June (see page 3). Emerging market equities were mostly higher in June (see page 9), with the largest gains in Argentina (+26.6%), China (+7.7%), and Thailand (+6.2%), and losses in India (-1.2%).

In currencies, the USD Index was lower (-1.7%) in June (see page 10), with the biggest gains against the USD seen in the Canadian Dollar (+3.2%), New Zealand Dollar (+2.9%), and Norwegian Krone (+2.6%). Emerging market currencies were also stronger against the USD, with the largest gains in the South African Rand (+3.5%), Russian Ruble (+3.4%), and Korean Won (+2.8%).

The US interest rate curve shifted lower, and remained inverted in June (see page 12). 10 year rates closed the month at 2.01%, down from 2.12% at May month end. US investment grade and high yield spreads tightened in June (see page 13).

In commodities, the GSCI index was up 4.4% in June (see page 11), with gains in Precious Metals (+7.7%), Energy (+6.6%), Industrial Metals (+2%), and Agriculture (+0.3%), and losses in Livestock (-2.4%). Within individual commodities, Palladium (+15.7%), Crude Oil (+9%), and Gasoline (+9) saw the biggest gains, while Lean Hogs (-10%), Natural Gas (-5.6%), and Corn (-2.2%) saw the biggest losses. Gold was up 8% for the month.

Contact CurAlea Associates for a Daily Market Review.

May 2019 - Monthly Market Commentary


May was a difficult month for global risk assets as the US/China trade dispute deepened, and the US announced new tariffs on Mexico (to begin to take effect on June 10), in an attempt to force Mexico to slow the flow of migrants. Global equities fell sharply, led by losses in China, credit spreads widened, the US yield curve inverted further, the US dollar strengthened, and the oil complex sold off. The Federal Reserve made no change to interest rates at its May 1 meeting, and indicated that slowing inflation could become a concern. Minutes from the meeting stated that “a patient approach” to adjusting the federal funds rate would “likely remain appropriate for some time”. US retail sales unexpectedly fell in April, and industrial production dropped. In Germany, the latest reading on factory orders showed a below forecast increase of 0.6%, and business sentiment dropped in May; yields on the German 10 year bond fell to a record low of -0.21%. In China, growth in both factory output and retail sales decelerated in April, while the Purchasing Managers’ Index fell below 50 in May, indicating a contraction from the prior month; in an effort to stimulate the slowing economy, the People’s Bank of China reduced the reserve requirement for regional banks. In Japan, meanwhile, first quarter GDP grew at a faster than expected rate of 2.1%, boosted by falling imports and a strong increase in public investment. The US jobs report showed that 263,000 jobs were added in April (the 103d consecutive month of job creation), the unemployment rate fell to 3.6% (a 50 year low), the labor force participation rate moved lower to 62.8%, and average hourly earnings rose 3.2% from a year earlier.

Notable corporate transactions announced in April included the $1.2 billion sale of Keebler and other brands by Kellogg to Ferrero, a $38 billion bidding war for Anadarko Petroleum by Chevron and Occidental culminating at month end with a $10 billion investment by Berkshire Hathaway in Occidental, the $4.4 billion purchase of Alliance Data’s Epsilon unit by Publicis, the $1.2 billion acquisition of Paragon Bioservices by Catalent, DSV’s $4.6 billion purchase of Panalpina, the $1.2 billion acquisition of Tranzact by Willis Towers Watson, the $3.6 billion purchase of Oryx by Stonepeak Infrastructure Partners, the $2.8 billion acquisition of DenizBank by Emirates NBD, the $750 million sale of Trilogy Education to 2U, the $8.6 billion purchase of a 90% stake in Transportadora Associada de Gas by a group led by Engie, the $850 million acquisition of Axoima by Deutsche Borse, the $1.2 billion acquisition of Wells Fargo’s retirement and trust unit to Principal Financial, the $1.7 billion purchase of Electronics for Imaging by Siris Capital, Waste Management’s $4.9 billion purchase of Advanced Disposal Services, Nippon Paint’s $2.7 billion acquisition of DuluxGroup, the $2.7 billion purchase of ConocoPhillips’ North Sea assets by Chrysaar, Canopy Growth’s $3.4 billion acquisition of Acreage Holdings, the $1.4 billion purchase of CapeOmega by Partners Group, the $1.4 billion purchase of JR Automation by Hitachi, and the $3.7 billion acquisition of Lord by Parker Hannifin.

Developed market equities rose in April (see page 8), with the biggest gains in Germany (+7%), France (+4.8%), and Spain (+4.4%). US small caps underperformed large caps, with the Russell 2000 up 3.4% and the Russell 1000 up 4% (see page 3). Financials (+9%), Communication Services (+6.5%), and IT (+6.4%) were the best performing sectors in April; Healthcare (-2.6%), Real Estate (-0.5%), and Energy (+0.1%) were the worst performing sectors (see page 2). Large cap value (+3.5%) underperformed large cap growth (+4.5%) in April (see page 3). Emerging market equities were mostly higher in April (see page 9), with the largest gains in Taiwan (+4.2%), Korea (+3.3%), and Mexico (+3.2%), and losses in Argentina (-7.9%).

In currencies, the USD Index was higher (+0.2%) in April (see page 10), with the biggest gains against the Swiss Franc (-2.3%), New Zealand Dollar (-1.9%), and Swedish Krona (-1.8%). Emerging market currencies were mixed, with the largest gains in the Mexican Peso (+2.6%), Russian Ruble (+1.8%), and South African Rand (+1.4%), and the largest losses in the Turkish Lira (-6.7%), Korean Won (-2.3%), and Malaysian Ringgit (-1.3%).

The US interest rate curve steepened, but remained somewhat inverted in April (see page 12). 10 year rates closed the month at 2.50%, up from 2.41% at March month end. US investment grade and high yield spreads tightened in April (see page 13).

In commodities, the GSCI index was up 2.8% in April (see page 11), with gains in Energy (+6.4%), and losses in Industrial Metals (-3.5%), Agriculture (-3.4%), Livestock (-2.6%), and Precious Metals (-0.8%). Within individual commodities, Gasoline (+11.6%), Brent Crude (+7.5%), and Crude Oil (+6.5) saw the biggest gains, while Wheat (-6.9%), Aluminum (-6.5%), and Soybeans (-4.6%) saw the biggest losses. Gold was down 0.8% for the month.

Contact CurAlea Associates for a Daily Market Review.