This weekly report presents insights from our Global Investment Management team.
Corporate deals have grown significantly over the past few years from a post-recession low in 2009. According to data aggregated by Bloomberg, 2015 was the recent peak for corporate transactions, reaching almost $2.9 trillion in value with over 16,000 deals. Last year slowed from that amount, at least in terms of value, and only time will tell for 2017. Currently, over $1.3 trillion in M&A activity has been announced in the first half of this year – nearly 30% higher from the same time in 2016. While the momentum appears convincing, companies seem to be less willing to pay higher prices for acquisitions as deal premiums decline and borrowing costs rise.
The Federal Reserve raised interest rates a quarter of a point in its meeting last week and gave the markets a hint of what’s to come. The Fed left their third hike for this year on the table, but may be pushing the date from September to December as they assess the effects of the “great unwinding”. Officials intend to let $6 billion of Treasuries and $4 billion of mortgage-backed securities roll off the balance sheet monthly, gradually increasing that amount each quarter. The yield on the 10-year Treasury climbed on the news, but ended up being mostly unchanged at 2.16% as of yesterday after sliding from around 2.4% in early May. Markets seem to be taking the news in stride despite the reality that quantitative easing was a major support to the equity bull market over the past several years. Investors will need to grasp that the unprecedented unraveling could have unforeseen effects on financial markets.
The White House has initiated a search for a replacement to current Fed Chair Janet Yellen as her term expires in February next year. The hunt may end up being futile as a recent Bloomberg economist poll suggested Yellen would likely be re-appointed; however, other candidates still stand a fighting chance. Meanwhile, amidst renewed sanctions against Russia and the ever-growing controversy around the obstruction of justice probe, President Trump has nominated James Clinger as chairman of the FDIC. Clinger, an opponent of Dodd-Frank, may spearhead the deregulation of financial institutions; if confirmed, he will begin his term later this year. Financial stocks jumped on the news, but are on par with the broader S&P 500 Index since the announcement.
Financial markets appear to be sort of, well, stuck. Mind you, stock markets are at all-time highs and bond yields remain dampened at all-time lows in an environment where geopolitics are a key risk. There is a laundry list of potential geopolitical threats that may have a heightened impact on markets: the beginning of official Brexit negotiations this week, oil prices and Mid-East tensions as Gulf states enact sanctions on Qatar, continued sanctions against Russia from the U.S. and European Union, military conflict with North Korea, U.S. policy transformations, and, not to mention, turmoil within the White House. Despite these different situations, the CBOE Volatility Index has somehow lingered near its lowest levels ever. This begs the question, what are investors waiting for?
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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