Weekly Market Snapshot

18 June 2018

The Fed’s Rate Hike: Substance and Style “Various factors have deteriorated my credibility as president of the central bank”

- Frederico Sturzenegger, resigning as head of Argentina’s central bank in the wake of the rout of the Argentine peso.

... The week in review:

Fed Rate Hike: Substance and Style Chairman Powell’s post-meeting press releases are both informative and brief, with a focus on the intentions of the FOMC as well as its actions. The all-but-guaranteed two rate hikes for the rest of 2018 were clearly described as a minor adjustment due to economic strength, and a welcome move toward a more economically neutral rate than has been in place since the 2007 Global Financial Crisis.

Financial markets seemed to get the message; the carefully-scrutinized yield for 10-year U.S. Treasuries spiked briefly to 3.0069%, but has been headed downward since then, suggesting a slightly reduced fear of inflation – at least over the ten-year time frame. As of 11:07 AM on Friday, June 15, the indicated yield was 2.9022%. The 5-year 5-year break-even inflation rate remained at roughly 2.1%, staying well within its 2.25% to 1.95% trading range, where it has been since mid-January 2018.

The Fed’s continued efforts to reduce its balance sheet were also mentioned. In that vein, the FOMC’s slight adjustment of the interest it pays its member banks to leave deposits with the Fed (now at 1.95%) may have been intended to encourage depositors to seek better returns outside the Fed’s own balance sheet.

Meanwhile China’s central bank decided to leave its benchmark rate unchanged as a means of continuing its support of the economy, rather than following U.S. rates higher.

China-U.S. Trade: More Confrontation Friday saw the White House release a list of hundreds of additional proposed items for its proposed $50 billion in increased tariffs on China. These wouldn’t take effect immediately; they are subject to the same review and approval process as the previous, shorter list. China’s Ministry of Commerce responded immediately with a tariff proposal of its own, along with a restatement of its policy favoring free trade.

Europe’s Economy: ECB Declares Gradual Victory In light of the current weakness in Europe’s economy in Q2, a continued policy of accommodation was welcome. But unusually, the ECB’s monthly press conference featured President Mario Draghi as a model of clarity and specificity. A gradual end to its ultra-accommodative bond-buying program has been scheduled; €45 billion, the current level, for September, then a €15 billion reduction each month in October, November and December 2018. Interest rates would remain at their current levels at least through the summer of 2019, or longer if needed. Debt remaining on the ECB’s balance sheet would continue to be reinvested “for an extended period” after the end of December 2018.

Global Oil: The Meetings Will Continue Until…In advance of the upcoming OPEC meeting this coming Friday, Saudi Oil Minister Khalid Al-Falih met with his Russian counterpart in the shadow of the Saudi-Russian World Cup match between their nations’ teams – as did Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman. Minister Al-Falih stated that a decision to increase OPEC and allied production was “inevitable”. On the other hand, he also said he expected Saudi Arabia to win the match in a “very tight game”, which the Russian team won 5-0.

... CHART OF THE WEEK:

EM Currencies: Volatility and Opportunity?

Chart of the week

Source: Bloomberg, 15 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:

  • So far this year, emerging market currencies (EM) have demonstrated their sensitivity to global economic trends, falling rapidly as short-term capital flows toward the U.S. to take advantage of rising short-term interest rates – and driving the greenback to levels not seen in over a year on a trade-weighted basis.
  • In addition to interest rate differentials, currencies like the Argentine peso, the Turkish lira, the Brazilian real, the Mexican peso and the South African rand have each reflected their economies’ own internal challenges as well as their exposure to the rising dollar, not least through the dollar-denominated price of oil. Since the beginning of Q2 2018, these five currencies have fallen -28.0%, -16.6%, -13.4%, -12.9% and -12.0% respectively against the U.S. dollar.
  • Little surprise, then that these descents have been accompanied by rising volatility. Since the middle of March, when it became clear that the Federal Reserve was committed to “normalizing” its benchmark target rate to post-2008 levels, EM currency volatility has broken away from the volatility of the more sedate G-7 currency group.
  • In times of rising currency volatility, it’s easy to lose track of the economic fundamentals of many – but clearly not all – EM economies, where the transition to services-led economies from raw-materials providers have reached a tipping point.
  • When upward-bound economies are over-discounted by global volatility trends, the difference represents a potential opportunity to astute, active investors driven by commitment to emerging markets and a keen sense of the strong fundamentals to be found by looking past the noise.

The chart:

  • The chart shows, from June 15, 2017 to June 15, 2018, the volatility of EM and G7 currencies, as represented by the J.P. Morgan Emerging Market and G7 Volatility Indexes.

All data Source: Bloomberg, June 15, 2018



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

IMPORTANT INFORMATION:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

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

11 June 2018

U.S. Economy: Hire and Hire “Nobody is forever…we don’t mind being six, if need be."

- French President Macron, implying that the G7 countries could potentially move forward on issues without the United States

... The week in review:

US Economy: Hire and hire The Labor Department announced that U.S. job openings rose to 6.7 million (seasonally adjusted) at the end of April. That’s more than the 6.3 million job-seekers – the second month when there were more openings than unemployed workers. Whether that’s enough to spark a meaningful uptick in wages remains to be seen. May’s month-over-month wage growth was a healthy 0.3%, but it remains to be seen whether that is sustained. There’s little to suggest labor demand will subside soon; earlier this week, a key reading for service sector activity came in stronger than expected, with the non-manufacturing index from ISM (Institute for Supply Management) rising to 58.6 in May, handily beating consensus expectations.

G7 Summit: Unhappy family The U.S. move to impose steel and aluminum tariffs on allies as well as opponents set the stage for a tense meeting by G7 country leaders on Friday in Quebec. Few expect to see attendees find common ground over trade policy, given President Trump’s pointed statements reiterating his positions just before departing for the summit meeting – and comments by French President Macron on Thursday implying that the rest of the ground could go it alone if necessary.

South America: Pain management The Brazilian real fell sharply to its lowest value against the U.S. dollar since March 2016, the latest leg in the currency’s painful slide since late January (down over 20%). President Temer asserted “there is no risk of a currency crisis” while Central Bank president Goldfajn noted an additional $20 billion (USD) would be offered in the futures market by mid-month to counter foreign exchange (FX) volatility.

Speculation continued, however, that more dramatic measures (such as a hike in the bank’s benchmark rate, currently at 6.5%) could be necessary to stabilize the currency, since its previous interventions in the currency market had little apparent effect. But things could be worse: consider Argentina, whose peso has plummeted even faster than the real – down more than 35% against the US dollar this year. As a result, it sought assistance from the IMF (International Monetary Fund), reaching a three-year, $50 billion loan agreement on Thursday – the largest ever of its kind – and a politically sensitive one for a country whose past relationship with the IMF has often been acrimonious.

Source: Bloomberg, Reuters, New York Times, Rio Times

... CHART OF THE WEEK:

EM: Looking Past Short-Term Volatility

Chart of the week

Source: Bloomberg, 6 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) currencies and debt have had a rough few weeks. Argentina, Brazil, Mexico, South Africa and Turkey have all seen their currencies plummet based on a host of local concerns – i.e. political stability, central bank independence, the threat of impending tariffs, or the belief that the country’s foreign exchange reserves were too small to allow it to effectively defend its own currency.
  • One result: aggregate EM bond returns have sagged. Year to date, U.S. dollar-denominated EM bonds have declined -3.57% and high-yield dollar-denominated bonds fell -4.22%; local-currency government bond returns fell -3.14%.
  • But those declines, along with policies designed to shore up their currencies, have resulted in rising yields – now strong enough to attract the attention of investors with global charters, unconstrained investment mandates and seekers of absolute (rather than relative return).
  • For five-year maturities, those yields include 6.92% for Russia, 8.116% for South Africa, 10.846% for Brazil, 15.270% for Turkey and 21.721% for Argentina.
  • In the ten years ended June 2018, there have been five major spikes in 10-day volatility of U.S. dollar-denominated EM yields, each related to crises in global finance. But over the long-term, the median volatility is low enough for many investors to tolerate some nervous moments.
  • Surprisingly, that long-term volatility is lower, rather than higher, for local-currency EM bonds. U.S. dollar EM bonds, over the ten years ended June 6, 2018, showed a median volatility of 7.84 over the period. But local-currency EM bonds came in at a median of 6.01. That’s despite the higher peak volatility for local-currency bonds of 72.71 on September 30, 2009, vs. the peak of 64.85 on November 3, 2008.
  • The bottom line: with yields high enough to merit attention from active investors, EM bonds, whether denominated in U.S. dollars or local currencies, can be worth the time needed to understand the risks they represent – especially in times of financial disruption.

The chart:

  • The chart shows, from June 9, 2008 to June 6, 2018, the 10-day volatility of the yield to worst for the the Bloomberg Barclays Emerging Market U.S. Dollar Aggregate Bond Index.

All data Source: Bloomberg, 7 June 2018.


DEFINITIONS:

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


IMPORTANT INFORMATION:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

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.

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.
© 2017 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

4 June 2018

Jobs Growth: So far, so good “[I have] a lot of determination to modernize our country, [as] the Socialist Party has always done.”

- Newly-chosen Spanish Prime Minister Pedro Sanchez

THE WEEK IN REVIEW...

Jobs growth: So far, so good The U.S. jobs report for May came in solidly above expectations, with the headline unemployment rate at 3.8%, a low last seen in April 2000 at the end of the tech boom. Hourly earnings, the most closely-watched number from the report, rose 0.3% from April, and 2.7% year-over-year for the 12 months ended May 2018.

The overall report was treated as bullish [do you mean the report was bullish or the equity market reaction was bullish?] by equity markets, with the Dow Jones Industrial Average up about 236 points (0.97%) and the Euro Stoxx 50 up 47 points (1.38%) as of 1:40 PM Friday June 1.1 Focus appeared to be on the continued strong demand for workers and rising wages. It was a bit different for the bond markets, which appeared to read the news as favoring a total of two more rate hikes in 2018 rather than only one.

One intriguing number, reflecting a positive outlook on the part of workers: U.S. job leavers as a percent of total unemployment came in at 13.8% for May, a high not seen since February 2001. The logic: leaving a job, whether or not one has another, suggests either an increase in income which makes leaving economically attractive, or the belief that new jobs will be easy to come by when the time comes to rejoin the work force.

European politics: Musical deck-chairs In Italy, the newly-accepted ruling coalition turned out to have the same members as the one rejected by the President just days beforehand -- but with the problematic openly-Eurosceptic Finance Minister moved to the European Affairs desk. In Spain there was an actual job loss; due at least in part to a continuing corruption scandal, Prime Minister Mariano Rajoy was replaced as Prime Minister by Socialist leader Pedro Sanchez in a parliamentary vote of no-confidence. The final blow was dealt by what Mr. Rajoy called a “Frankenstein coalition” of the anti-establishment group Podemos and a faction of Catalan separatists, joined by the Basque Nationalists.

Global tariffs: All in the family The latest and loudest disagreements about tariffs are taking place among longstanding members of global alliances as well as across global spheres of influence. The stories about trade between the U.S. and Europe, and between the U.S. and the other members of NAFTA are moving too rapidly for a quick review. But it appears certain that these arguments could leave long-lasting disruptions of politically important regional relationships, making future agreements of any sort a challenge.

1 All data Source: Bloomberg, at the time specified.

All data source: Bloomberg

... CHART OF THE WEEK:

Inflation: Is the Fed Getting Its Way?

Chart of the week

Source: Bloomberg, 1 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:

  • The U.S. jobs report for May came in solidly above expectations, with the headline unemployment rate at 3.8%, a low last seen in April 2000 at the end of the tech boom.
  • Hourly earnings, the most closely-watched number from the report, rose 0.3% from April, and 2.7% year-over-year for the 12 months ended May 2018.
  • Growth in earned wages matters as a measure of potential downward pressure on corporate profits, a harbinger of future consumer demand, and the effect of both on inflation in general.
  • Because its mandate is to regulate inflation as well as support employment, the Fed scrutinizes each release of inflation-related data, be it producer prices, consumer prices, import prices, or wages in making its decisions to raise or lower rates.
  • The strong May report seems to support observers who believe that Fed will raise rates at least two more times by the end of 2018.
  • But direct measures of inflation tell a slightly different story.
  • The two the Fed watches most closely - the Core Personal Consumption Expenditure Deflator and the Fed’s own measure of financial market signals about the level of inflation five years from now - continue to converge on the Fed’s target rate of 2 percent.
  • The more volatile U.S. Treasury 5year-5year inflation breakeven rate is telling the same story, suggesting that in that segment of the market for U.S. Treasuries, the Fed has gained a significant measure of credibility in the years following the 2008 Great Financial Crisis.
  • The bottom line: markets and the Fed are pointing in roughly the same moderate direction for now, which potentially augurs well for financial markets overall over the coming months.

The chart:

  • The chart shows, from January 1, 2010 to June 1, 2018, the Core Personal Consumption Expenditure Deflator, the Fed’s estimate of the 5-year breakeven inflation rate, and the fixed-income market’s more volatile direct measure of the 5 year-5 year breakeven inflation rate.

All data Source: Bloomberg, 1 June 2018.



Important Information

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

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

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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

28 May 2018

The Fed: Shifting into neutral? “It's always better for all political leaders to let the central bank governors do the job that they have to do, and to preserve and secure their independence.”

- IMF Managing Director Christine Lagarde

... The week in review:

The Fed: Shifting into neutral? Newly-released minutes from the May FOMC meeting showed subtle changes in both style and substance from Dr. Yellen’s Fed. These shifts suggest that Chairman Powell appears to favor the role of moderator over individual contributor.

But the most important shift was on substance – namely, a slight tilt toward a more dovish stance. Specifically, the majority believed that interest rates are quite close to a “neutral” level, neither overly stimulative nor restrictive. And the prevailing belief was that it would be preferable to allow inflation to be somewhat greater than 2 percent, despite the strength of the labor market.

In practical terms, all this can be read as implying that the Fed, all else equal, envisages the need for two hikes in the remainder of 2018 rather than a more hawkish three.

Financial markets reacted immediately and positively. U.S. Treasury yields fell, pulling the 10-year back below the 3-percent threshold, to 2.944% as of 8:27 AM EDT.1 In stocks, the S&P 500 rising over 23 points to 2733.3, or 0.9%, intra-day.

Emerging Markets: Turkey in the weeds Given the pressure on emerging market assets from the rising dollar, the timing of next month’s presidential election, now scheduled for June 24, is unfortunate. That’s especially true because Turkey’s President Recep Tayyip Erdoğan chose this week to boost his popularity by suggesting an end to the policy independence of country’s central bank, and pushing toward significantly lower interest rates as a means of boosting growth.

Erdoğan’s strong-arm tactics hit the Turkish lira hard, sending it about 8 percent lower within 24 hours, declining as far as 4.9253 per U.S. dollar. After seeing the result of his statements, and after at least one conversation with his country’s central bank, he’s been silent on the issue since; the 300 basis-point emergency hike to 16.50 percent on May 23 appeared to stem the tide for a few hours. Other central bank moves since that time have included allowing exporters to repay dollar loans in Turkish lira at 4.2 per dollar, substantially more advantageous than exporters can now get on the open market. As of Friday May 25, the lira was trading between 4.8 and 4.7 per dollar. But another rout could be in store as soon as Erdoğan makes his next campaign speech.

Global oil: Getting a grip After Brent and WTI crude oil prices rose past $80 and $72.50 per barrel on May 22, key suppliers Saudi Arabia and Russia announced their willingness to open up the spigots, in an attempt to moderate the runup in prices since early April. Saudi Arabia is unlikely to meet resistance from the rest of OPEC, given its aversion to unintended price hikes; the current price moves appear to be in reaction to the collapse of Venezuela’s ability to extract and export oil, as well as the prospect of renewed sanctions on Iran.

1 All data Source: Bloomberg, at the time specified.

All data Source: Bloomberg

... CHART OF THE WEEK:

U.S. Economy: No Road to Recession

Chart of the week

Source: Bloomberg, May 24, 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 prospect of a recession remains a concern for some investors, based in part on shape of the U.S. yield curve, which has flattened significantly in recent months. But a careful look at key economic indicators tells a different story.
  • Consider one useful way to measure the economy’s pulse: the volume of freight travelling by truck within the U.S., which has been reliably downbeat when the overall economy has been shrinking.
  • Indeed, the volume of freight travelling by truck has fallen more than 15% year-on-year during five of the six recessions that have taken place since early 1974 – a period of some 44 years.
  • More recently, freight volume has grown during most of the period since the Great Recession of 2008-2009. As of the end of April 2018, year-over-year volume has been strong – up 8.9% since the same period in 2017.
  • Of course, trucking volume is only one indication of overall economic strength. But other measures tell the same story, according to Legg Mason’s ClearBridge Investments.
  • ClearBridge Investment Strategist Jeff Schulze, who tracks the economy via his Recession Risk Dashboard, reports that the likelihood of a recession over the next 12 months remains low. For more detail, read: U.S. Economy: Keep on Trucking.
  • That Dashboard looks at four overall factors: business activity, the consumer, inflation, and financial conditions. All four now point to expansion, with only one sub-category – profit margins – even slightly off its strongest level.
  • So in their view, the coast is clear, at least for the coming year – and the economy should in all likelihood have a clear road ahead.

The chart:

  • The chart shows, from March 1973 to April 2018, the year-on-year change in the volume of goods shipped by truck, with the periods of economic recession indicated.

All data Source: Bloomberg, May 26, 2018.


DEFINITIONS:

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.


Important Notes:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Important Information
All investments involve risk, including possible loss of principal.
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. 

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
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.
© 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

21 May 2018

Crude oil: Production caps, the hard way “Any renegotiated NAFTA that implies losses of existing Mexican jobs is unacceptable,"

- Ildefonso Guajardo, Mexico’s Economy Minister

THE WEEK IN REVIEW...

Crude oil: Production caps, the hard way The benefits accruing to the prices of Brent and WTI crude oil are coming from two main sources: within Opec, it’s the inability of Venezuela and Angola to produce the volume of crude oil their quotas allow; outside Opec, it’s Russia’s crumbling oil infrastructure and sanctions, as well as the difficulty of getting U.S. Permian Basin crude oil to its customers.

Brent crude briefly touched $80 per barrel (bbl) on May 17, a price not seen since October 2014, as crude was falling from $115 to $47 – and eventually to $27.88 on January 20, 20, 2016. It’s unclear what, if any, effect the chaos around the multiparty Iran nuclear deal will have on that country’s ability to sell on the open market.

With global growth in solidly positive territory, the demand side of the equation is unlikely to offer any relief. Neither is the U.S. consumer’s preference for larger vehicles, combined with the higher profitability of said vehicles to their manufacturers.

Politics in Italy: Careful what you wish for The newly-formed populist coalition, which includes the League and the Five Star Movement, revealed its difficult-to-negotiate “government contract”, which leaves some key items unspecified – like the name of the new Prime Minister. More important for financial markets: the creation of a “public investment bank”, supporting airline Alitalia despite its troubles, and introducing such “budget-busters” as a “universal citizens’ income” and a rollback of the rise in the minimum retirement age.

Financial markets voted with their feet, sending the FTSE MIB index down about 1.5% at the close, and putting the yield spread between Italy’s and Germany’s sovereign bonds at an uncomfortable 165 and 68 basis points for the 10- and 2-year. But the members of the respective parties have yet to vote on their joint program, so the worry created by the as-yet-incomplete details of the program might be premature.

U.S. consumption: Paying retail After the upward revision for March, April’s retail sales figures were on trend but no better, at 3% for the headline figure as well as the more precise control-group number, which excludes vehicle dealers, service stations and building material stores. Though not disappointing, the figures suggest that consumers are not driving, or even leading, the economy toward faster growth.

German factory backlog: Mixed messages Germany’s Federal Statistics Office reported the economy-wide factory order backlog was large enough to keep factories busy for over five months without additional orders. The figures are even larger for producers of investment goods, referring to items used in the manufacture of other goods. All this led Germany’s central bank to start its report for April as follows: “The German economy continues to boom…”

But another way to look at the backlogs is as a representation of production bottlenecks, If those bottlenecks are created by parts shortages from elsewhere, these figures send an entirely different message.

All data Source: Bloomberg

... CHART OF THE WEEK:

Yield or Income? Yes, Please

weekly chart of the week

Source: Bloomberg, May 18, 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:

  • For income investors, today’s higher Treasury yields are growing more tempting, when compared to aggregate stock yields.
  • But today’s rising rate environment actually makes both asset classes potentially more attractive, albeit for different reasons.
  • Over the past five years, the yield of the S&P 500 Index averaged a fairly steady 2.02%, despite some notable ups and downs.
  • By comparison, yields for 2- and 10-year U.S. Treasuries hit new 5-year highs, reaching 3.11% and 2.56% on May 16 and 17th, respectively.
  • But while bond prices do indeed fall when yields rise, the combined impact of falling prices and higher yields on total return is much more complex. The current environment could mean increased opportunities for higher-coupon income-producing assets. In fact, as coupons rise, the effect of dividends on total return could very well increase.
  • For equity investors, the relatively steady aggregate yield of the S&P 500 - during both rising and falling price periods over the past five years - has been supported by the improving financial health of its constituent companies. Both earnings and earnings payout ratios have increased.
  • And interest rates are rising at least in part due to an improving overall economic picture – which could likely be positive for stocks.
  • It should be remembered that both stocks and bonds are subject to rises and falls in total return over time, but the strengths of each asset class show up there as well; for example, the CBOE 10-year U.S. Treasury Note Volatility Index has averaged 5.22 over the past 5 years, while the more familiar stock-based CBOE VIX Index has averaged 14.67 over the same period.
  • Bottom line: Though the pressure on fixed-income yields has its origins in rising rates, investors might be well served to see the longer-term advantages of both asset classes in the current rising rate environment.
  • The chart:

    • The chart shows, from January 1, 2013 to May 17, 2018, the yields of 2- and 10-year Treasuries, along with the 12-month dividend yield of the S&P 500 Index.

All data Source: Bloomberg, May 18, 2018.


DEFINITIONS:

The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.

The FTSE-MIB Index consists of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Foreign shares are eligible for inclusion


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.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Discussions of individual securities are not intended and should not be relied upon as the basis to buy, sell or hold any security. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

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

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance.

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

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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

14 May 2018

U.S. Inflation: Missing in Action "If [the Fed is going to raise rates], it's got some time to wait because the next two moves are anticipated anyway and whether it does a third this year or early next year, that's something you can decide at a later stage"

- Former Fed Vice-Chair Stanley Fischer

THE WEEK IN REVIEW...

U.S. inflation: Missing in action For a brief moment, consumer price inflation, at 2.5% for the 12 months ended April 30, looked convincingly greater than the Fed’s 2 percent target threshold. But core consumer inflation, not including volatile food and energy prices, rose a smaller 2.1% over that period. When combined with March’s 1.9% reading for the Fed’s favorite inflation reading (the PCE Deflator), the overall news was less than exciting. Which could be one reason that inflation-sensitive 30-year U.S. Treasuries haven’t risen past 3.11% for at least a year, the Fed’s breakeven inflation calculation still reads under 2.17% for five years out, and the U.S. yield curve continues to break records for flatness. A contributing factor may be the strength of the dollar against virtually all major currencies, driving down costs of imported goods and services.

U.S. corporate spending: Why ask why? The Institute for Supply Management (ISM) released its latest semiannual forecast, which found that a surprisingly low one-in-three purchasing and supply executives surveyed said they’ve recently boosted their capital spending for the next 12 months. Within that group, only about 14% cited the recent tax overhaul as the reason; the “general business outlook” was cited as the primary catalyst.

Since these are opinions rather than hard measures, they’re even more subject to interpretation that most measures. But what counts is whether the investment actually takes place, and whether the tax windfalls are invested in future productive capacity or in increased wages, or stock buybacks intended to boost reported earnings per share.

Italy: Ever closer Billionaire kingmaker Silvio Berlusconi has endorsed the unlikely combination of the League and the Five Star Movement as partners in a yet-to-be-formed ruling coalition. As their respective leaders Mateo Salvini and Luigi Di Maio continue policy discussions into the weekend, some observers suggest that their joint platform would be significantly less extreme than the stated positions that won them the right to form a government in the first place.

League leader DeMaio was said to have consulted with Giorgia Meloni, leader of the far-right Brothers of Italy party, either to bring them into the coalition or to get a promise that they wouldn’t stand in the way of the Leagues possible move toward the center. The stakes are high; failure would most likely lead to yet another election, more uncertainty as to its outcome, and more delays in creating a government.

UK: BoE’s Brexit blink. At the beginning of the month, many still believed the Bank of England would make good on Mark Carney’s subtle but clear indication that it would raise the base rate from 0.50% on May 10. But the Monetary Policy Committee voted 7-2 to keep the rate steady, citing uncertainty created by “the exceptional circumstances presented by Brexit”. That uncertainty has only grown; each of the competing proposals for how to implement the breakup is unacceptable to at least one of the parties, and the battles over them within the Cabinet have become increasingly public, costing one member her post.

All Data Source: Bloomberg

... CHART OF THE WEEK:

Oil and Iran: This Time It’s Different?


Chart of the week

Source: Bloomberg, May 11, 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:

  • Now that the U.S. has decided to withdraw from the Iran nuclear deal and reimpose its own embargo on Iranian crude, all eyes have turned to the crude oil market to assess what the move might mean for the price of energy in the months and years to come.
  • Since June 21, 2017, Brent Crude ran up from $44.82 per barrel (bbl) to as high as $77.47 at the close on May 10th of this year, a rise of about 75%. As usual, there was no single cause – but the move coincided with renewed supply discipline on the part of the Opec cartel after the beginning of Iran’s resumption of pre-embargo production in January 2016; the growing effectiveness of the latest sanctions on Russia; and growing confidence about future demand from the world’s developed and developing economies.
  • During the last embargo, Iran’s share of Opec’s total output fell from just under 13% to just over 8%, and Opec picked up much of the slack, keeping its production in the 30-32 million bbl/day, falling to 29.6 million at the end of November 2013.
  • Iran’s resumption of production coincided with the cartel’s aggressive attempt to recapture its share of global production lost to U.S. shale-oil producers, ramping production to as high as 34 million bbl/day, driving crude oil prices down from its $110 range in August 2013 to lows of about $34.75 at the end of 2015. At the time, legendary oil man T. Boone Pickens described the production ramp-up as an attempt to “teach those shale boys a lesson.”
  • Given Iran’s current relatively modest 12% share of Opec’s total production, the reimposition of an embargo on Iran by one of the 6 parties to the nuclear agreement might not move the needle as much as some expect.
  • In addition, the latest flare-up of armed conflict in the Middle East is in fact a continuation of a struggle that’s been going on in one form or another since before 1982. And it’s notable that Russia has chosen to sit out this latest bout – when rationales for its involvement would be easy to find if Putin were so inclined.
  • Bottom line: This most recent conflict in the Middle East is unlikely to be a repeat of the days of gasoline rationing and soaring fuel prices. But with Opec’s return to self-control, it’s also unlikely that prices will plummet. And for U.S. stocks, the recent rise in crude-oil prices has been an added source of support.

The chart:

  • The chart shows from January 2000 to the end of April 2018, Opec’s total crude oil production and the price of Brent crude oil, along with Iran’s proportion of Opec’s production during that period.

All data Source: Bloomberg, May 11 2018.


DEFINITIONS:

The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.

The Bank of England is the central bank of the United Kingdom.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.


Important Notes

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.
Discussions of individual securities are not intended and should not be relied upon as the basis to buy, sell or hold any security. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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.

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

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

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

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.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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.

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