Weekly Market Snapshot

13 August 2018

Turkey: Contagious or Contained?“If they have dollars, we have our people, our righteousness and our God”

- Turkish President Recep Tayyip Erdogan

THE WEEK IN REVIEW...

Turkey: Contagion, or contained? The plummeting Turkish lira was the subject of a massive market selloff this week, making it the worst performing currency of the year so far at some 40%.

Fears of contagion were stoked by media reports of loan exposures to the tune of some €140 billion by banks in Spain, France and Italy. That brought EU bank stocks under pressure, with declines of about 4% as of mid-day Central Europe time. But those figures are anecdotal so far; and it’s not known if these positions were held in Turkish lira or if they were hedged.

The proximate cause of the landslide was the refusal of Turkey’s central bank to increase its base rate from 17.75% at its most recent meeting on July 24 in the face of rapidly rising inflation. The matter was made worse by the lack of substantive policy moves since that date; the president’s son-in-law, now Finance Minister as well as head of the central bank, has been noncommittal. The president’s most recent proposal: for citizens to bring their “mattress money” euros, dollars and gold1 to their local banks and exchange them for Turkish lira.

Turkish President Erdogan is travelling to regions strongly supportive of his rule, stoking anger at alleged conspiracies of the global financial system and proposing infrastructure projects such as roads and bridges to stimulate growth.

The U.S. has seen tensions with Turkey in recent months, related to Turkey’s imprisonment of an American pastor and differences of policies in the Middle East. On Friday, President Trump tweeted a proposed increase in tariffs on Turkish steel and aluminum.

Consumer inflation: One for the hawks Core consumer prices rose at an annualized 2.4% in July, the highest since September 2006. Including autos and energy, the rise was a strong 2.9%. These figures were slightly above consensus expectations and were good news for “hawkish” supporters of the Fed’s continued steady pace of rate hikes for the rest of 2018 and into next year.

There were downsides to these results, most notably for wage earners: inflation-adjusted average weekly earnings rose at an annualized 0.1%, below expectations and well below June’s 0.5% revised annualized rate. Average hourly earnings actually fell, -0.2%, below June’s 0.0% rate.

China: The central bank reports. According to Bloomberg’s translation, the Q2 report from the People’s Bank of China (PBoC) reiterated its standing policy of not competitively devaluing the yuan, or of using the currency as a tool to cope with external shifts such as trade tension. It described the task of achieving high-quality growth as “arduous” but beneficial in the long run.

1 “Mattress money” refers to money in the form of cash, foreign currencies and precious metals such as gold, that are held in physical form in households, intended as an informal safety mechanism for household wealth.

... CHART OF THE WEEK:

EM Currencies: Turkey: One Bad Apple?


Chart of the week

Source: Bloomberg, 10 August, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The Turkish lira is plummeting again on Friday. Over the past month, the currency has fallen over 20%; since the beginning of the year, in the range of 35% - 40%.
  • So far, neither the Turkish central bank nor the government have taken any of the traditional, well-understood measures to stem the tide. The government has not appealed to the International Monetary Fund, established of capital controls on people or banks, and not raised interest rates to compensate prospective bondholders enough to take the plunge and bet on an eventual recovery.
  • Instead, in a rally mid-day Friday, President Erdogan exhorted citizens to bring their “mattress money” euros, dollars and gold to local banks to exchange them for Turkish lira as an act of patriotism.
  • It’s perhaps understandable that some investors might see the current situation as the embodiment of their worst EM nightmare, and choose to move away from the entire asset category.
  • But active investors with experience in EM currencies might be seeing something else; namely, a very country-specific mix of political tensions; regional instability; and economic decisions that drain foreign currency reserves at the same time as increasing the country’s hard-currency indebtedness.
  • Contrast that situation with Mexico, for example, whose currency has appreciated over 3% year to date, as a gradual change of government after a landslide election has proceeded without visible trauma.
  • Granted, not all EM economies resemble Mexico. But it might be useful to note that the MSCI Emerging Market (EM) Currency Index has fallen a mere 3.66% year to date as of early Friday, August 10, vs. the 40% decline in the Turkish lira, part of the EM universe.
  • All of which suggests that there are other EM economies that don’t share Turkey’s troubles, and could be momentarily priced below their fair market value.
  • Bottom line: While Turkey’s situation is dismaying, astute managers in developed markets are free to turn to opportunities in less troubled countries and proceed accordingly. For a long-term perspective on EM economies in general, explore Brandywine Global’s Emerging Markets: Dangerous? Or Just Like the Rest?and Martin Currie’s The EM Trends that Matter.

The chart:

  • The chart shows, for January 1 – August 10, 2018, the percentage change vs. the U.S. dollar of the Turkish lira, the Mexican Peso, and the MSCI EM Currency Index.

All data Source: Bloomberg, August 10, 2018, unless otherwise specified.


All market-related data Source: Bloomberg, August 10, 2018 unless otherwise stated.

DEFINITIONS:

Emerging market (EM) countries are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI EM Currency Index sets the weights of each currency equal to the relevant country weight in the MSCI EM Index.


IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Active management does not ensure gains or protect against market declines.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

6 August 2018

U.S. Jobs: Still hiring “The Chinese side always believes that bad things can turn into good things and challenges can be turned into opportunities”

- China’s Ministry of Commerce, commenting on the state of the most recent trade debate with the U.S.

... The week in review:

U.S. Jobs: Still hiring July’s employment report was solid if unexciting, with an as-expected 3.9% unemployment rate and a labor participation rate also unchanged at 62.9%. This was a good-news/bad-news report, with non-farm payrolls rising 170k, less than the expected 193k, average hours worked unchanged from May at 34.5 and hourly wages still rising at an unchanged 2.7% annualized rate.

One bright spot in the July report was in manufacturing, where employment rose a larger-then-expected 37k, bringing the total for manufacturing and related jobs added over the past 12 months to 688k, the largest 12-month increase since November 1994. The real significance, however, was to be found in timing; July was the first full month of the first set of tariff hikes. The employment category of “manufacturers, builders, miners and drillers”, where the impact of tariffs might be expected to make employers hesitant to add workers, showed an increase, rather than a decrease.

The Fed: Upgraded Outlook As was widely expected, the FOMC’s August meeting saw no change in the Fed Funds target rate, maintained at 2.0%. The decision was unanimous among the eight voting members, leaving readers to pore over the brief statement for clues about shifts in outlook. Confidence in the strength of the economy was easy to find as “solid” was replaced with “strong”. In addition, the cautious words “for now”, included in Chair Powell’s Congressional testimony, were absent from the statement, suggesting increased resolve to stick to the plan to raise rates.

But there was a hint that inflation wasn’t as strong as previously expected, describing it as “near” its 2% target rather than “at or over” that level. Does that shift in language suggest that the Fed anticipates weakness in inflation that hasn’t yet shown up in the numbers? The answer may be contained in the economic forecast which will accompany the next FOMC meeting, which will conclude on September 26.

UK: Straight talk Bank of England Governor Mark Carney held interviews right after the Bank of England raised its policy rate 25 basis points to 0.75% in a unanimous vote. During one such session, Mr. Carney said that the odds of Britain leaving the European Union (EU) without an agreement were “uncomfortably high”, setting off a debate about whether the hike was premature, or even wrong-headed.

But this hike appeared to be about rate normalization after the 2008-9 Global Financial Crisis rather than about Brexit. This hike had been expected to take place in March or April 2018 and was delayed until now due to local economic issues.

China: Market based change The People’s Bank of China announced the reinstatement of a 20% reserve requirement on banks that sell dollars to clients using currency forward contracts. The reserve requirement had been lifted in September 2017, after its initial instatement in October 2015 during a period of decline in the currency. Banks are required to pass this cost along to their clients whose trades meet the requirement. This change makes it more expensive for these clients to buy dollars in exchange for yuan, reducing the financial incentive for this trading and reducing selling pressure on the yuan.

All market-related data Source: Bloomberg, July 20, 2018 unless otherwise stated

... CHART OF THE WEEK:

U.S. Stocks: Strong Earnings Season

Chart of the week

Source: Bloomberg, 2 August, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • This quarter’s earnings season has been strong. With over 80% of companies in the S&P 500 reporting so far1, per-share earnings have beaten consensus expectations by 5.3%, bringing the current P/E of the index to 20.6 times current earnings. Sales per share have also beaten expectations by a little over 1.5%.
  • The sector with the largest upside surprise in earnings has been Consumer Discretionary, with an upside surprise for 45 of the 75 companies in the sector of 12.8%. Energy is the only sector missing its expected results, by -6.9%.
  • It’s important to keep in mind that expectations change during the course of the year; hits or misses can be as much about unreasonable expectations as about financial strength.
  • But current expectations are important to measure against history; they give valuable insight into whether the equity market is overly optimistic about future earnings.
  • Here, the news is positive overall; based on today’s consensus earnings expectations for the following 18 months or so, the S&P 500’s P/E for the end of 2019 should be about 17.2 times earnings, solidly below the average P/E over the past decade.
  • While P/E analysis can give a status report on the overall market, there’s substantial variation in results from sector to sector, within sectors, and for individual stocks. For example, the Consumer Discretionary sector, with its 12.8% upside surprise, contains the Internet & Direct Marketing Retail subsector. Within that subsector, TripAdvisor Inc, surprised a relatively small 3.8% to the upside, while Expedia Group Inc surprised upward by 55%.
  • Bottom line: The equity market overall, as represented by the S&P 500, is solidly within the range of the past decade. But the wide variation in earnings results within the index suggests that fundamentals-driven active management can have an important place in an investor’s approach to building a portfolio for the future. For more, see Clearbridge’s Jeff Schulze most recent market assessment: U.S. Equities: Beyond the Wall of Worry.

1 Source: Bloomberg, as of August 3, 2018, 8:20 AM ET.

The chart:

  • The chart shows, for the period December 31, 2009 to June 30, 2018, of the P/E Ratio of the S&P 500 Index – as well as the forward P/E of the index between September 30, 2018 and December 31, 2019, as estimated by Standard and Poor’s.

All data Source: Bloomberg, August 3, 2018, unless otherwise specified.


DEFINITIONS:

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The price-to-earnings (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings). The forward P/E ratio is a stock’s (or index’s) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead.


IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Active management does not ensure gains or protect against market declines.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

30 July 2018

U.S. Growth: Exports and Consumers to the Rescue “We’ve got a template for a good relationship"

- U.K. Brexit Secretary Dominic Raab, describing the now-rejected proposal to the European Union

... The week in review:

U.S. growth: Exports and consumers to the rescue The U.S. economy grew strongly in the second quarter at an estimated 4.1% annual rate (inflation-adjusted), according to the “advance” first estimate from the Bureau of Economic Analysis.

Though this release relies on incomplete data from other departments, two important trends were clear. First, the main drivers of growth in Q2 were consumer spending (core spending up 2% from Q1) with a hefty contribution from foreign trade, especially exports. Second, the quarter saw notable investment in inventory – likely due to restocking from unexpectedly strong exports. But for this restocking, the growth number would have been even stronger.

It’s worth noting that the robust growth for the quarter is underpinned by two relatively volatile factors, both of which depend in large part on global trade to fuel growth. Nonetheless, the absolute size of this past quarter’s growth isn’t bad news for observers worried about the current state of the economy.

European growth: Slow and steady Inflation and growth in the Eurozone are steadily improving, according to European Union figures. Growth for Q1 was at a 2.1% annualized rate (the latest figures available) . Inflation has shown real progress after years of struggle, reaching 2% year-over-year for Q2, a figure not seen since early 2012, the heart of the EU’s downward slide into recession.

That’s not to say all is well. Unemployment in France remains at about 9% and wage growth is stubbornly low, perhaps due to recent revisions in restrictive labor laws. Italy’s progress continues to be slow as politics makes coalition-building difficult; Greece is not yet back on its feet from an economic point of view, and the recent horrific fires have taken their toll both in lives and spirit.

But the European Central Bank (ECB) appears to understand the challenges. At its most recent monthly meeting, President Mario Draghi repeated the Monetary Policy Committee’s commitment to keep its strongly stimulative stance in place well into 2019 at the earliest; there appears to be little appetite to repeat the experience of 2010-2012, when the ECB raised rates, thereby provoking an 18-month period of negative growth and political upset.

Brexit: Blues again Prime Minister Theresa May has taken direct control of the UK’s negotiations with the EU, seeking to arrive at a unified, relatively accommodative interpretation of the mandate delivered by the Brexit referendum, in the wake of public bickering and resignations among her ministers.

However, her most recent stance has been rejected outright by EU’s Brexit chief negotiator Michel Barnier, posing new political pressures and renewing speculation that Prime Minister May’s leadership might not survive the negotiations needed to reach agreement before a rapidly-approaching deadline.

All market-related data Source: Bloomberg, July 20, 2018 unless otherwise stated

... CHART OF THE WEEK:

Europe: Slowly Winning the Inflation War

Chart of the week

Source: Bloomberg, 26 July, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • Recent headlines on world trade underscore the interdependence of the world economy -- where growth depends on the economic success of each region as well as their trade with each other.
  • Europe’s persistent struggle to jumpstart growth was back in the headlines – via the recently announced tariff moratorium between the U.S. and the European Union .Six years ago, European Central Bank (ECB) President Mario Draghi famously said the ECB would do “whatever it takes” to bring the Eurozone back to financial health, and brought the bank’s benchmark deposit rate into unprecedented negative territory, where it remains to this day.
  • As of June, the strategy appears to be succeeding. Europe’s economy has been growing steadily – if slowly – as a combination of bailouts, bail-ins and oversight have helped the worst-off economies from collapse.
  • The most recent data show Eurozone Gross Domestic Product (GDP) grew at a year-over-year 2.5% rate in Q1 2018; inflation for Q2 came in at a 2% year-over-year rate, hitting the ECB’s inflation rate target for the first full quarter since December 2012.
  • Wage growth has been picking up in the Eurozone as well; in the first three months of 2018, hourly wages rose 2 percent – one of the key reasons given by the ECB to not only stay the course at this past week’s monthly meeting, but to give clear forward guidance that rates would stay at this rate well into 2019, if not beyond.
  • The bottom line: Eurozone growth has benefitted from astute central bank policies over the past six years, improving the investment climate. Barring geopolitical issues, or policy-generated challenges from tariff negotiations and Brexit, the current course could become self-sustaining as the ECB eventually withdraws its support and follows the U.S. path of rate normalization.

The chart:

  • The chart shows, for the period September 30, 2010 to July 26, 2018, the annualized growth in GDP, inflation and ECB deposit rates, for each quarter.

All data Source: Bloomberg, 26 July 2018, unless otherwise specified.


DEFINITIONS:

The Barclays EM U.S. Dollar Aggregate Bond Index includes dollar-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.


IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Active management does not ensure gains or protect against market declines.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.

© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

23 July 2018

U.S. Growth and the Fed: Fade to Beige? "The risk that current trade tensions escalate further… is the greatest near-term threat to global growth"

- IMF chief economist Maurice Obstfeld

THE WEEK IN REVIEW...

U.S. Growth and the Fed: Fading to Beige? Testifying before Congress last week, Fed Chair Jerome Powell was cautiously optimistic about the country’s growth trajectory, mostly resisting the temptation to opine on matters outside the Fed’s brief – including the impact of tariffs on specific regions or sectors of the economy.

But the July edition of the Fed’s Beige book, released on July 18, is more revealing. The report, designed to tease out emerging trends that “may not be readily apparent in the economic data”1 , noted expansion in all 12 Fed districts. Still, manufacturers in all districts expressed concern about tariffs; in many, they reported higher prices and supply disruptions attributed to new U.S. trade policies.

A second potential constraint to future growth was the inability to find workers, which was reported in most districts. More specifically, six districts specifically mentioned trucking capacity shortages, which they blamed on a shortage of commercial drivers.

These qualitative trends, for the most part, have yet to work their way into general economic statistics. But the Beige Book suggests that if current trends continue, it’s just a matter of time before they do. And once these issues affect planning for corporate capital expenditures, their effects could be more widespread.

Commodity prices: Testing one’s metal The effects of newly-imposed tariffs on steel and aluminum have rippled through the commodities markets. A key example: copper prices. The cash price for copper on the London Metals Exchange (LME) fell from $7,330.50 per metric ton on June 7, to $6,039.50 on July 19, a 17.6% decline. Year to date, palladium is down some 15.6% to $896.61 per Troy ounce.

The common denominator between the two metals: industrial demand. Copper is essential in construction, electrical and electronic equipment; palladium is the key ingredient in automotive catalytic converters. These, and other commodity markets, can be fickle, changing with shifts in sentiment. But since the futures markets for these commodities are used by industry to manage their own production costs, changes in price can have significant real-world impact.

Brexit: Borderline European Union (EU) chief Brexit negotiator, Michel Barnier, said on Friday that he is ready to negotiate on options for preventing a “hard border” in Ireland in the wake of the onset of Brexit in March 2019. Barnier said he is open to any solutions “so long as they are workable and can be transformed into legally operative text in time for the withdrawal agreement”. That could be a tough hurdle to clear, since the EU plan calls for effectively including Northern Ireland in the EU’s single market and customs union, a solution that’s been called unacceptable to UK Prime Minister Theresa May.

Much of the disagreement is focused on what happens if an agreement can’t in fact be found – the “backstop”. which is intended to ensure that there will be no hard border on the island of Ireland – even if a long-term solution can’t be found before the end of the UK’s post-Brexit transition period. But the mere fact that both parties appear to be eager to get on with the negotiations is itself a positive sign that a workable agreement may yet be found.

1 July Beige Book, Introduction and Table of Contents.

All market-related data Source: Bloomberg, July 20, 2018 unless otherwise stated

... CHART OF THE WEEK:

Bonds: A World of Choices

Chart of the week

Source: Bloomberg, 19 July, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The world’s financial markets are constantly changing, but one thing remains constant: opportunity can be found in unexpected places – and global investing is a time-honored way to transcend the limits of any individual market.
  • That’s quite apparent in this week’s chart, which shows the highest returns for global fixed-income investors over the past three years have come from diverse sectors of the fixed-income universe, including global high yield, Emerging Market (EM) hard-currency, and, despite their relatively low yields, European bonds. In contrast, US bonds, are fairly far back in the pack, thanks to the surge in short-end yield generated by the Fed’s recent rate hikes.
  • However, the narratives that underlie the variations in yield in the global bond market are more complex than just interest rates and currency valuations – including the rapid growth of global information technology companies based in emerging markets, localized needs for new infrastructure, and the evolving realities of global trade.
  • Also important in the current environment: finding the opportunities created by turmoil. As concerns about global trade and liquidity rise, markets often punish asset classes and categories with sound fundamentals – throwing out babies with the bathwater.
  • It takes an experienced, global, fundamentals-driven active investment approach to discern the difference between real damage and undeserved discounting, an approach that relentlessly seeks the inevitable errors in pricing that turbulence can generate.
  • Bottom line: When added to the natural diversification that comes from differing geographies, currencies and economic cycles, the potential benefit of looking outside the usual opportunity sets can clearly be seen.

The chart:

  • The chart shows, for the 1-year and 3-year periods ended July 19, 2018, the total return of selected global bond indexes, along with the most recent yield-to-worst.

All data Source: Bloomberg, 19 July 2018.


DEFINITIONS:

The Bloomberg Barclays Pan-European Aggregate Index tracks fixed-rate, investment-grade securities issued in the following European currencies: Euro, British pounds, Norwegian krone, Danish krone, Swedish krona, Czech koruna, Hungarian forint, Polish zloty, and Slovakian koruna. Inclusion is based on the currency of the issue, and not the domicile of the issuer.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Bloomberg Barclays Euro Aggregate Bond Index is a benchmark that measures the investment grade, euro-denominated, fixed- rate bond market, including treasuries, government-related, corporate and securitized issues

The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market.

The Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

The Bloomberg Barclays EM Hard Currency Aggregate Total Return Index includes debt denominated in US dollars, euros and other “hard” currencies.

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market.


Important Information

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. Active management does not ensure gains or protect against market declines.

IMPORTANT INFORMATION:

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2017 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

16 July 2018

U.S. Jobs: Changing Times “[The People’s Bank of China] will not make the yuan’s exchange rate a tool to cope with trade conflicts.”

- Sun Guofeng, head of the PBoC’s financial research institute said that the bank

... The week in review:

U.S. Jobs: Changing Times Since the U.S. economic recovery, all eyes have been on the relatively sluggish growth of hourly wages, hoping that wage inflation would help boost domestic consumption, while fearing that rising wages would cut into corporate profitability. In that light, June’s inflation-adjusted average hourly wage growth year-on-year of 0.0%, for the second month running, did little to comfort proponents of consumer-led growth.

But employees appear to be seeking a different solution to the challenge of stagnant wages, by changing jobs. The Job Openings and Labor Turnover Survey for May (the “JOLTS report”), revealed that some 3.56 million workers voluntarily quit their jobs that month, a record number and the highest rate in 17 years. The quits rate was watched closely by former Fed Chair Janet Yellen as a measure of worker optimism over and beyond the unemployment rate.

June’s consumer prices, ex food and energy, rose 2.3% year over year, in line with expectations and personal consumption inflation reported earlier, suggesting that the JOLTS figures for June, which are scheduled to be reported in August, may contain few surprises.

Mexico: Looking Up The convincing victory of Andrés Manuel López Obrador (AMLO) as President has left currency markets relatively unruffled and helped boost Mexican equities by about 6% over the following week. The reaction seems to indicate that financial markets take the former firebrand at his word that his actions upon taking office at the end of the year will be constructive toward business.

China: Policy Stability The People’s Bank of China (PBoC)Governor Yi Gang clearly stated that the country’s policy toward exchange rates was unchanged, intending to “keep the yuan exchange rate basically stable at [a] reasonable and balanced level”. In addition, Sun Guofeng, head of the PBoC’s financial research institute said that the bank “will not make the yuan’s exchange rate a tool to cope with trade conflicts.” That last point was viewed as crucial in calming the concerns of other financial markets, as the trade tensions between the U.S. and other countries, including China, continued to grow.

Meanwhile, China’s new yuan loans in June came in at 1.84 trillion yuan ($275.0 billion), above expectations. This was consistent with China’s planned reduction in the banking required reserve ratio by 50 basis points, to 15.505, which could free additional capital with which to make loans.

All market-related data Source: Bloomberg, July 13, 2018 unless otherwise stated

... CHART OF THE WEEK:

Stocks: Market Valuation Holding Steady

Chart of the week

Source: Bloomberg, July 13, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • July sees the beginning of corporate earnings season, as U.S. companies announce their financial results for the second quarter. As of the close of business on Friday, July 13th, eight S&P 500 companies will have reported, including J P Morgan (JPM), one of the Dow Jones Industrial Average’s 30 companies.
  • With U.S. stocks well into the ninth year of a bull market and up slightly year to date, investors will focus on what this past quarter could reveal about profitability over the next two years, or further out.
  • In terms of forward earnings, valuations continue to be supportive. Using consensus 3-year forward earnings estimates1, the S&P 500 is now trading at about 14.3 times, well below its peak of 16.5 toward the end of 2017.
  • Though the economic and policy assumptions behind these earnings estimates vary widely, it’s possible that the effects of the recent corporate tax cuts and expected increase in government spending aren’t reflected in these estimates, leaving room for additional upward earnings revisions – and a resultant improvement in valuations going forward.
  • Clearly, there will be both winners and losers among the companies making up the S&P500, the Russell 2000, and other well-known indexes, as well as for companies whose stocks fall outside these benchmarks.
  • In the current economic environment, experience and fundamental analysis can offer guideposts for active managers to find companies able to take advantage of the changes ahead.

1Source: Bloomberg estimates, as of July 12 2018

The chart:

  • The chart shows, from January 2016 to July 2018, the S&P 500 Index alongside its estimated three-year forward P/E

All data Source: Bloomberg, July 13, 2018.


DEFINITIONS:

TheS&P 500 Indexis an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Theprice-to-earning- (P/E) ratio is a stock's (or index’s) price divided by its earnings per share (or index earnings). The forward P/Eratio is a stock’s (or index’s) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead.


IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Active management does not ensure gains or protect against market declines.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
All investments involve risk, including possible loss of principal.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444. 
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China ("PRC"):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

2 July 2018

U.S. Economy: Goldilocks Scenario? “Italy is no longer alone”

- Giuseppe Conte, Italy’s new Prime Minister, on the European Union’s agreement concerning immigration policy

THE WEEK IN REVIEW...

U.S. Inflation: Goldilocks scenario? May’s inflation figures should please the Federal Open Market Committee (FOMC); core inflation for the 12 months ended May 31 came in at 2.0%, right on target and the highest in over six years, and slightly above the consensus expectations of 1.9%.

But personal consumption spending rose 0.2% in May from April, slightly lower than expected and noticeably lower than the 0.4% growth in personal income for the month. That suggests consumers may have been banking the difference – good for household balance sheets, slightly less so for the economy as a whole. Adjusted for inflation, personal spending was flat – 0% for the month.

Fixed-income markets greeted the numbers calmly, with the 10-year Treasury trading at about 2.847%. Equity markets were slightly more enthusiastic, with the major U.S. indexes up about 1%, helping the S&P 500 and the NASDAQ Composite potentially end the first six months of 2018 at gains of 2.5% and 9.5% respectively.

Immigration: The Italian job Friday’s early-morning deal on immigration gave enough to Italy’s newly-minted Prime Minister Giuseppe Conte to allow him to gain credibility with his coalition partners back home. At the same time, German Chancellor Angela Merkel apparently won enough concessions to increase the odds of her fragile coalition government surviving dissent from Bavaria’s Christian Social Union party.

The language of the agreement was noticeably long on principles but short on details of implementation, many of which were left to member states. But as a joint declaration of the principle of “burden sharing” of migrants, the agreement was a step forward.

But there was one carefully-specified item apparently tailored to win Italy’s approval: an agreement to create “controlled centers” in EU member states with “full EU support” to "distinguish between irregular migrants, who will be returned, and those in need of international protection, for whom the principle of solidarity would apply." Euphemisms notwithstanding, the key to this component was the presumed financial and bureaucratic support of the EU in managing these “centers”, a clear improvement over leaving their care to the member countries, whose approach remains varied.

Mexico’s election: Suspense Polls suggest the July 1 Presidential election will be won by firebrand Andres Manuel Lopez Obrador (“AMLO”). Concern about his promises to restore the public sector’s role in the economy via resurgent spending has moved to the back burner in the face of his personal popularity – a shift reflected in the currency market, where the Mexican peso has been moving up vs. the U.S. dollar over the past two weeks – one of the few emerging market currencies to do so.

Of course, the prospect of a president with populist leanings participating in negotiations over NAFTA might not bring about increased policy stability in the continent’s current configuration. And public-sector participation in the economy has a mixed track record in Latin America; observers often mention Venezuela and Cuba in this context.

But the presidency isn’t the only office in the election. All of the Senate’s 128 members, along with all 500 members of the lower house, Mexico City’s mayor and eight of the 31 states’ governors are up for a vote.

All market-related data Source: Bloomberg, June 22, 2018 unless otherwise stated

... CHART OF THE WEEK:

Emerging Markets: The Dollar Effect

weekly chart of the week

Source: Bloomberg, 29 June, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Emerging Market (EM) equities have had a difficult 2018 so far, falling -11.8% in local currency terms since the peak on January 26.
  • Explanations abound, including the effect of disarray in global trade policy, country-specific challenges in Turkey, Argentina and Brazil, and a drawdown of global liquidity due to the start of the unwinding of global central bank largesse.
  • But the decline has been particularly painful for U.S. dollar-based investors because of the U.S. dollar’s recent rise against most of the world’s currencies. For them, EM returns have fallen -16.9% since this year’s peak.
  • Clearly, there are some forces restraining EM economies that have little to do with the U.S. Internal factors, including political turmoil, have hurt several major players including Brazil, Turkey, South Africa and Argentina.
  • But the dollar’s rise is not helping dollar-based investors. Reasons for the greenback’s rise include the visibility of U.S. economic growth in 2017 and the first half of 2018, the continued moderate pace of inflation, the ability of financial assets to absorb the beginning of the Fed’s rising rate regime, and the expectation of positive fiscal impact of increased government spending.
  • For U.S. based investors, all this has meant an end of the “free ride” in incremental return provided by appreciating EM currencies since the end of 2016 as their economies as a group gain in financial strength and access to global sources of capital.
  • The bottom line: The variety of successes and failures within EM is a key reason for investors to focus on country and company specifics – including currency dynamics – rather than on the behavior of the asset class overall – the kind of focus that can be provided by fundamentals-driven active management of this asset class.
  • The chart:

    • The chart shows, from January 26 to June 28, 2018, the performance of the U.S. dollar and local currency MSCI Emerging Market Net Total Return Indexes, along with the U.S. dollar on a global trade-weighted index.

All data Source: Bloomberg, 28 June, 2018.


DEFINITIONS:

The MSCI EM (Emerging Markets) Index, priced in local currencies or in U.S. dollars, is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries.

The Bloomberg Dollar Spot Index tracks the performance of a basket of ten leading global currencies versus the U.S. Dollar. Each currency in the basket and their weight is determined annually based on their share of international trade and FX liquidity.


Please Note:

Active management does not ensure gains or protect against market declines.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

IMPORTANT INFORMATION:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

In the U.S. - INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

All investments involve risk, including possible loss of principal.

Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.
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This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
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