Weekly Review Brief - July 29, 2019

Posted by FlexShares on Jul 29, 2019 10:34:10 AM

Blog Image 29Jul2019

Global equities pressured by geopolitical tensions.  Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities push higher despite mixed economic data. Global equities gained 0.8% last week with gains in U.S. equities (1.7%) offsetting declines in non-U.S. developed (-0.2%) and emerging markets (-0.8%)1. Better-than-feared earnings growth, as well as central bank easing and lower interest rates, have helped support equities despite mixed economic data. Other developments last week included an agreement to extend the U.S. debt ceiling and an announcement of another round of U.S.-China trade talks2. Global equities are now up 18.4% year-to-date led by U.S. equities at 22.3%3. Non-U.S. developed market and emerging market equities, trail U.S. equities but remain in double digits at 14.6% and 10.2%, respectively4.

Manufacturing data slides lower while services data holds firm. The U.S., Europe and Germany all experienced a decrease in flash Purchasing Managers’ Index (PMI) readings last Wednesday with each measure falling 1-2 points short of consensus expectations as well. Europe (46.4) and Germany (43.1) remain in contractionary territory, while the U.S. (50.0) is right on the dividing line between expansion and contraction. Services PMI readings moved up in the U.S. and somewhat lower in Europe, but remain comfortably in expansionary territory in the low-to-mid 50s range.

Dovish ECB sets the stage for September stimulus. The European Central Bank (ECB) held interest rates steady in its meeting last Thursday, but strongly hinted at future cuts as soon as September. ECB President Mario Draghi commented that recession risks remain low but the manufacturing sector outlook has slipped5. Meanwhile in the U.K., Boris Johnson of the Conservative Party became the Prime Minister succeeding Theresa May last Wednesday. A strong Brexit supporter, Johnson faces a number of constraints as he looks to resolve Brexit by the October 31 deadline6.

Government scrutiny of large tech companies continues. Facebook agreed to pay $5 billion to resolve the Federal Trade Commission’s investigation into its privacy violations. The agreement also forced the creation of an independent privacy committee, which removes final privacy authority decisions from CEO Mark Zuckerberg. The Justice Department announced it will review large tech companies involved with search, social media and online retail to determine if the top companies in those fields have monopoly power7. Reviewing earnings season, 219 S&P 500 companies (44%) have reported thus far with earnings and sales growth at 4.2% year-over-year (y/y) and 4.7% y/y, respectively. Both measures are currently above consensus expectations8.

This Week Preview

2Q earnings season continues across all sectors. A mix of companies will report this week as earnings season approaches its halfway point. Companies in focus include Verizon (VZ), General Electric (GE), Procter & Gamble (PG), DuPont (DD), Apple (AAPL), Chevron (CVX), Pfizer (PFE), Merck (MRK) and Exxon Mobil (XOM)9.

Investors expect a 25 basis point cut from the Federal Reserve. Fed funds futures have been fully pricing in a July Fed rate cut following the June meeting, but investors have been divided on the size of the cut. After Fed officials walked backed the idea of a 50 basis point cut two weeks ago, markets are fairly certain the new policy rate will be 2.25% after this Wednesday. This would be the first rate cut from the Fed since December 2008. Investors will focus in on the Fed’s dialogue about future policy direction in addition to the Fed’s views on the growth environment, the inflation outlook and how external factors like U.S.-China trade tensions may affect the U.S. economy10.

Healthy jobs report expected along with slight uptick in core inflation. Economist surveys show 169k jobs added for July, which is very close to the 170k average from the previous three months. Reviewing other employment figures, the unemployment rate is expected to remain unchanged at 3.7% while wage growth is also expected to stay near the prior level at 3.1% y/y. In additional economic data, core Personal Consumption Expenditures is expected to slightly increase to 1.7% y/y.

Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.

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End Notes

  1. 1. Bloomberg, MSCI World Index returns 22Jul2019 – 26Jul2019. Bloomberg, MSCI U.S. Equities IMI Index 22Jul2019 – 26Jul2019. MSCI World ex-U.S. IMI Index returns 22Jan2019 – 26Jul2019. MSCI Emerging Market Equities Index returns 22Jul2019 – 26Jul2019.
  2. 2. Mui, Ylan. Pramuk, Jacob. Mallika, Mitra. CNBC. White House, Congress strike a two-year debt ceiling and budget deal. Retrieved on 29Jul2019 from https://cnbc.com/2019/07/22/us-debt-ceiling-and-budget-deal-near-final-suspends-ceiling-for-2-years-source.html.
  3. 3. Bloomberg, MSCI World Index returns 02Jan2019 – 26Jul2019. MSCI U.S. Equities IMI Index 02Jan2019 – 26Jul2019.
  4. 4. MSCI World ex-U.S. IMI Index returns 02Jan2019 – 26Jul2019. MSCI World ex-U.S. IMI Index returns 02Jan2019 – 26Jul2019.
  5. 5. Amaro, Silvia. CNBC. ECB signals a rate cut, more monetary easing ahead. Retrieved on 29Jul2019 from https://cnbc.com/2019/07/25/ecb-rate-decision-juy-2019.html.
  6. 6. Smith, Saphora. NBC. Boris Johnson becomes new UK prime minister after Theresa May resigns. Retrieved on 29Jul2019 from https://nbcnews.com/news/world/boris-johnson-set-assume-office-britain-s-77th-prime-minister-n1033281.
  7. 7. Shepardson, David. Reuters. Facebook to pay record $5 billion U.S. fine over privacy; faces antitrust probe. Retrieved on 29Jul2019 from https://reuters.com/article/us-facebook-ftc/facebook-to-pay-record-5-billion-us-fine-over-privacy-faces-antitrust-probe-idUSKCN1UJ1L9.
  8. 8. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 29Jul2019 from http://lipperalpha.financial.thomsonreuters.com
  9. 9. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 29Jul2019 from http://lipperalpha.financial.thomsonreuters.com
  10. 10. Bloomberg, Fed Funds Futures Index 29Jul2019. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.

Tags: Weekly Market Update