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From our Investment Team | Weekly Commentary 1.29.18

by: Investment Team - Rfg Advisory Group .
published: January, 29th 2018


Investment Team - Weekly Commentary

As is customary for this time of year, the markets have been focused on news coming out of Davos. Treasury Secretary Steven Mnuchin comments dominated headlines as they were interpreted as being accepting of a weaker dollar. Given the market's reaction to these comments, we thought it would be worthwhile to provide a quick summary of the potential impacts of a weaker dollar along with general market news.

Markets performance last week was mixed with strong equities contrasted against continued rising yields for treasuries.  The S&P 500 was up 1.4% last week, with strong performance in Health Care and Consumer Discretionary sectors, with weakness in Energy. On the earnings front, companies from the old guard reported weak earnings along with even weaker outlooks for 2018 such as GE and Ford, however overall earnings season thus far is above consensus for EPS growth and revenue leading to a positive outlook for 2018. Interestingly, a narrative supporting the equities markets besides strong fundamentals is strong capital inflows from individual investor especially younger investors. As expected with the "risk-off" environment supported by strong macroeconomic fundamentals, Treasuries continue to sell-off with 10-year trading at 2.71% yield for the first time since 2014.    

The interesting thing about 10-year Treasury yields rise is that it has become disconnected from the performance of United States dollar. This disconnection is unique because typically as Treasury yields increase it drives capital flows into the dollar which strengthen the currency. However, other factors have trumped this relationship since the initial downward movement with the news of China decreasing purchases of Treasury securities. These factors include rising energy prices (despite the dollar becoming less sensitive to energy prices with the continued increase in shale production) along with the stronger explanation of equity market flows in favor of the Euro over the dollar.

Fundamental and technical explanations aside, the ongoing global discussions surrounding the weaker dollar will drive the currency as well. Markets reaction to Steven Mnuchin’s comments highlighted this fact last week. Thus, the markets could be pricing in the United States desire for a global reflationary environment where the falling dollar and strong global growth lead to decreased trade imbalances. Currently, the market lacks a consensus on the driver of dollar weakness. However, the impacts of continued weakness are expected to be 1) increases in asset prices in the U.S., 2) reduced vulnerability of USD denominated EM corporate debt, and 3) decreased G3 inflation performance with could undermine ECB and BOJ efforts leading to an extended period of the current expansionary monetary policy. Based on these impacts a weaker dollar could be a good thing for the average investor right now.

 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.