Monthly Market Update for June 2016

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Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.

Global Economy:

Recent economic data displayed underlying strength in consumer spending buoyed by strong employment gains.  In its final reading on first quarter growth, the Commerce Department reported the economy grew at an annualized 1.1% rate.  First quarter economic momentum appears to have carried over into the second quarter as June’s employment report was the strongest since October 2015 and activity within the manufacturing and services sectors rose amid strong gains in orders.

June employment data from the Labor Department showed employers added 287,000 jobs in June, after a disappointing 11,000 gain in May.  The unemployment rate rose to 4.9%, from 4.7% in May due to an increase in the number of people looking for jobs.  Factory activity in June expanded at the fastest pace in more than a year as the Institute for Supply Management’s (ISM) manufacturing index increased to 53.2 in June from 51.3 in May.  Likewise, stronger orders and sales led to an expansion of the ISM’s non-manufacturing gauge to its fastest pace in seven months.

Consumer spending rose modestly in May, led by outlays for durable goods such as automobiles.  US housing demand was robust as sales of existing homes climbed in May to the highest level in more than nine years, while sales of new homes declined from an eight-year high in April.  Inflation rose 1.0% in May from a year ago and core inflation, which excludes food and energy costs, increased 2.2% over the same period.  The Federal Reserve (Fed) voted to keep the target range for the federal funds rate unchanged at 0.25% to 0.50% but reiterated that interest rates are likely to rise at a “gradual” pace.

Near the end of the month, United Kingdom (UK) citizens unexpectedly voted to exit the European Union (EU).  The vote shocked financial markets as the British pound plunged to its lowest level since 1985 versus the US dollar (USD).  Volatility ticked up across asset classes and safe haven assets rallied.

Global Markets:

In a knee jerk reaction to the unexpected results from Britain’s decision to leave the EU on June 23, volatility rose in global markets.  Investor risk appetites declined leading to a rotation into sovereign bonds.  However, in short order many investors viewed the weakness as a buying opportunity and the S&P 500 was able to close June with modest gains.  The S&P 500 gained 0.3% in June led by telecommunication and utility companies, while financials lagged with a loss of 3.4%.  Overall, six of ten sectors posted gains.  Small cap stocks declined as the Russell 2000 fell 0.1% with five of nine sectors losing ground overshadowing a 7.4% gain by utility shares.

The shock resulting from the Brexit vote led to a two-day loss of $2.9 trillion in market capitalization for the MSCI ACWI index.  However, markets rebounded over the final days of trading in June to limit the damage.  The global equity benchmark, MSCI ACWI index, fell 0.6%.  Six of ten sectors had positive returns led by utility and energy stocks, while financials declined 4.9%.

Both European and United Kingdom equities suffered the brunt of the selloff, as the MSCI Europe and MSCI UK indexes fell by over 13.0% over the two days following the vote.  The MSCI Europe index recovered around half the losses to finish down 4.4% (USD) in June and the MSCI UK index rallied to finish down more than 4.0% (USD).  The UK losses reflect the significant decline in the British pound, which dropped to near 30-year lows versus the USD.  In contrast to most developed markets, emerging market equities rallied post-Brexit.  These markets were buoyed by the expectation that central banks will ramp up stimulus measures to support global economic growth, raising the appeal of riskier stocks.  The MSCI Emerging Market (EM) index climbed 4.1% in June, the best performance since March.

The Bloomberg Commodity index was up 4.1% for the month led by an 8.7% gain in gold as demand for safe haven investments increased.  Crude oil dropped 1.6% in June, paring a 30.5% year to date gain.

The Fed moved to a more dovish stance in 2016 after Brexit raised uncertainty surrounding prospects for global economic growth.  Minutes from their June meeting revealed fewer Fed officials expected the central bank to raise interest rates more than once this year.  US 10-year Treasury yields closed at 1.40% on June 23, just shy of the record low of 1.38% recorded in July 2012.  For the month, 10-year yields plunged 38 basis points (bps) to 1.47%, while two-year yields fell 30 bps to 0.58%.  The BofA Merrill Lynch US Treasury index gained 2.3%, the best month since January 2015.  For the year, the index is up 5.7%.  The flight to safety theme helped US municipal bonds post positive returns in June as the Barclays Municipal Bond index rose 1.6%.  US corporate investment grade bonds rallied sending yields down to 2.88%, from 3.14% in May per Barclays data.

Developed market sovereign bonds advanced in June, compressing yields on European sovereign debt to record lows after the Bank of England suggested it may need to loosen monetary policy later this summer.  Additionally, the European Central Bank indicated it may expand the scope of its bond purchasing program.  Peripheral European debt advanced on the prospects for added stimulus.  Italian 10-year bond yields fell 10 bps to 1.26%, while Spanish 10-year yields dropped to 1.16% from 1.47% in May.  Benchmark German 10-year yields plunged into negative territory, ending June at -0.13%, a decline of 27 bps for the month.

A more dovish tone by the Fed coupled with stabilizing emerging market currencies supported a rally in emerging market bonds in June.  The JPMorgan EMCI index of EM currencies rose 3.1% versus the USD.  The spread to own EM sovereign debt versus US Treasuries narrowed 15 bps in June to 409 bps, driving the JPMorgan EMBI Global index of USD debt to a gain of 3.7%.  Local currency sovereign debt advanced, capping the best monthly return since March, while EM corporate debt rallied for a fifth consecutive month.

Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG).  This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.

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