This weekly report presents insights from our Global Investment Management team.
U.S. stocks have reclaimed ground over the past several days after the S&P 500 Index plummeted 1.78% in Wednesday trading hours last week. Growing scrutiny over interference during the U.S. presidential election and worries whether President Trump will be able to pass much of his promised legislation, particularly while defending his administration from political allegations, seemed to be a sobering experience for financial markets.
However, the unease was fairly short-lived as the S&P neared record levels yet again yesterday after Trump’s first detailed budget proposal reached Congress. The proposed budget includes $3.6 trillion in spending cuts over the next 10 years, which would reduce federal assistance programs like Medicaid and boost military and infrastructure spending. The plan would also garner funds by selling half of the U.S. government emergency oil reserve, which was created after the 1973 oil crisis spurred by an Arab oil embargo.
Trump met with leaders in Saudi Arabia, one of the largest oil producers in the world and the de facto leader of OPEC, over the weekend. Based on information from Reuters, the president and Saudi officials agreed to a number of trade and energy deals, including what could be the largest arms deal in U.S. history, totaling over $350 billion. Aerospace and defense companies, an industry subclass of the S&P 500, have gained over 25% since President Trump’s election victory and jumped 1.26% on the news. Saudi Arabia and Russia, the two largest oil producers in the world, continue to advocate for OPEC to maintain production cuts in an effort to boost prices. Oil prices have climbed over 12% after hitting a low of $45.52/barrel earlier this month, based on NYMEX data; crude was trading around $51/barrel as of today. While curbing supply seems to be helping prices, political crises will also have an impact.
The largest crude oil producers in South America, Brazil and Venezuela, are in the midst of political upheaval. Massive protests have called for the rooting out of corruption at the highest level of government. Venezuela has been in the throes of revolution as violent demonstrations have taken place for over a month. The oil-led economy has rapidly deteriorated and may head into default as evidenced by some 2018 Venezuelan government bonds yielding close to 38%, according to Bloomberg. Meanwhile, Brazil’s supreme court will convene next week and could decide whether to impeach current President Michel Temer amid corruption and obstruction of justice charges. Despite the turmoil, investors seem to be using this as a buying opportunity. As news broke on the corruption scandal, Brazil-focused ETFs saw $22 million in outflows followed by $551 million in inflows over the next two days, as reported by Bloomberg.
Our team believes geopolitics has taken center stage for financial markets and will likely be the main influence of direction over the short term. We continue to review key risks surrounding Brexit negotiations, an economic slowdown in emerging markets, specifically in China, and U.S. fiscal policy disappointment. While a detailed budget proposal is on the table, it is still up for debate and may not pass in Congress as is. We remain vigilant in our review of current markets and will make additional proactive adjustments as events unfold.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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