Weekly Market Snapshot

22 April 2019

"The complex competition in technology and strategic influence [between the U.S. and China]... is not something that will be resolved overnight."

- Singapore Finance Minister Heng Swee Keat

... The week in review:

China: Soft landing or rapid resurgence?

Official figures for growth in Q1 showed strength. GDP came in at a 6.4% annualized rate and 6.4% year-on-year, besting expectations. Figures were boosted by March industrial production growth of 8.5% year-on-year, well above forecasts. Retail sales for March showed 8.7% year-on-year growth, also ahead of expectations.

Analysts credited tax cuts and renewed boosts to local-government infrastructure spending. Consumption drove more than 65% of the activity during Q1, confirming assessments by consumer-facing companies that demand from individuals continued strong. Spokesman Mao Shengyong of China's National Bureau of Statistics described the data as "relatively stellar", especially against a backdrop of weak international trade and other adverse conditions. Also contributing to positive sentiment: comments by some U.S. officials of rapid progress in trade negotiations between China and the U.S.

Eurozone: Manufacturing slowdown

April's manufacturing PMI (Purchasing Manager Index) figure for the region signaled contraction for the third consecutive month, coming in at a worse-then-expected 47.8. (PMI figures above 50 signify expansion; below 50, contraction)

German manufacturing was at the center of the decline, with its PMI at a below-consensus 44.5, the fourth consecutive month of contraction. Germany's economy ministry had already cut its own forecast for 2019's full-year overall growth to 0.5%, the most recent downgrade of its projection for 2019 of 2.1% a year ago. This revision would make Germany the Eurozone's second worst performing economy after Italy for the full year 2019. German Economy Minister Peter Altmaier commented that the "current weak phase in Germany's economy must be a wake-up call"; and yet, Steffen Seibert, the Chancellor's spokesman, denied the need for a growth-boosting package of plans.

Many observers blame Eurozone sluggishness on tariffs, both current and future; the International Monetary Fund (IMF) cut its outlook for global growth on indications higher tariffs are impacting global trade.

U.S. economy: Stockpiling strength

Industrial production for March disappointed, falling by 0.1% vs. February's 0.1% growth. Capacity utilization also fell short of expectations at 78.8% vs. an expected 79.2%. Part of the reason for disappointment could be due to inventory accumulation during previous quarters. That would lower the need for production as excess inventory gets drawn down, especially if sales volume softens.

U.S. government figures indicate that inventory accumulation added an average 1.2 percentage points to overall economic growth in Q3 and Q4 2018. Examples include autos, where the six-month average of dealer inventory of cars and trucks stood at 75 days of sales, the highest level since 2009. Furniture and clothing manufacturers and retailers face similar challenges. The National Federation of Independent Businesses (NFIB) reported in its otherwise upbeat March report that for the first time since December 201, small business owners planned to reduce rather than increase inventories. Some reports suggest that the inventory buildup was intended to head off the impact of trade disputes between the U.S. and its partners. If so, a decisive resolution of the trade conflict between the U.S. and China could take slightly longer to ripple through the economy.

Inventory buildup also means that the impact of Friday's stronger-than-expected March vs. February retail sales growth of 0.9%, ex autos and gasoline, could have less impact on overall growth than if those sales were more closely matched by improvements in manufacturing and imports – something less likely if there’s significant inventory already on hand.

All prices Source: Bloomberg, as of April 18, 2019, unless specified otherwise.

... CHART OF THE WEEK:

EM stocks: Closing the Valuation Gap
Price-to-book valuation: emerging vs developed markets (3/09 - 3/19)

Chart of the week

Chart courtesy of Martin Currie. Source: Bloomberg, as of 3/31/2019. 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. Emerging markets represented by the MSCI Emerging Markets (EM) Index and developed markets by the MSCI World Index.

The bottom line:

  • Emerging market (EM) stocks are trading at a significant discount (33%) to developed markets in terms of price-to-book valuations (1.6x vs 2.4x, respectively).1
  • That gap began widening in early 2012, thanks to causes as varied as the Greek debt crisis, a long recession in Brazil, a collapse in commodity prices in 2015 and concerns about China’s growth rate, which eroded investor confidence.
  • Over the last two years, higher U.S. interest rates and a stronger U.S. dollar have also weighed heavily on EM currencies and valuations.
  • All this has also resulted in significant EM underperformance. That’s a stark contrast to the strong average performance over the past 20 years, which arguably better reflects the long-term growth potential of EM.2
  • Now, with U.S. interest rate expectations subdued, this valuation gap may begin to close, if we see market-friendly outcomes to Sino-US trade talks and India’s national elections, as well as more signs of economic stabilization in China and globally.
  • Of course, given the diversity of the sector, it’s critical to recognize that opportunities are best evaluated at the individual company level—through an experienced active manager like EM equity specialist Martin Currie.
The chart:

  • The chart shows the price-to-book (P/B) ratio for the MSCI Emerging Markets Index and the MSCI World Index from March 31, 2009 through March 31, 2019.

11 The P/B ratio is a useful alternative to P/E when evaluating EM given the variations in earnings reporting and corporate governance around the world.

2 Source: Bloomberg. From 3/31/2012 through 3/31/2019, the MSCI World Index generated an average annual total return of 9.8% compared with 3.1% for the MSCI EM Index. However, for the 20-year period ended 3/31/19, the MSCI EM Index outperformed the MSCI World Index generating an average annual total return of 8.7% compared with 5.4%.


DEFINITIONS:

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms.

The National Federation of Independent Business (NFIB) is a US small business advocacy association, representing 350,000 small and independent business owners.

The price-to-book (P/B) ratio is a stock's price divided by the stock’s per share book value.

The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.


Important Information
All investments involve risk, including possible loss of principal.
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.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
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.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
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.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

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.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

15 April 2019

“The course of action will be entirely in the UK's hands…please do not waste this time.”

- EU President Donald Tusk on the extension of the deadline for Brexit until October

THE WEEK IN REVIEW...

Brexit: Careful what you wish for

The EU’s extension of the deadline for a negotiated Brexit that Prime Minister Theresa May brought back from Brussels last Wednesday added six months by shifting the already-revised date of May 22 to October 31. During that time, the European Union (EU) indicated it will be willing to ratify the deal already negotiated by May that has been repeatedly rejected by Parliament or give the UK an opportunity to "reconsider the whole Brexit strategy".

The UK's next moves are as yet unclear. The multiple public failures of Prime Minister May's first comprehensive plan, plus the realization that a "no-deal" Brexit would have brought short-term economic chaos in its wake, make the prospect of extending the painful process by half a year a mixed blessing.

U.S. growth: On the path

This week's economic reports confirmed earlier data that growth was still robust, even if not quite full speed. core inflation for consumers in March came in at a solid 2.0%. However, the job openings report for February (the most recent available) showed openings at 7.087 million -- significantly down than January's upwardly-revised 7.625 million and notably below consensus expectations.

Minutes of the FOMC's March 20 meeting, showed the committee describing price pressure as "muted", but also made clear that committee members were grappling with the same equivocation about the path of growth as financial markets – but their remarks also seemed less committed to a rate cut in 2019 than do Fed Funds futures prices.

Italy: Stop digging

Italy's ongoing dispute with the European Commission about its forecasts for the country's budget shortfall hit another snag. Growth for the full year 2019 is now forecast at 0.1%, vs. a previous forecast of 1.0%. If so, that downward revision would drive its budget deficit up to between 2.3% and 2.4% of GDP – notably above the level of 2.04% agreed with the European Commission in negotiations last year.

The short-term remedy will be to use a contingency fund of €2 billion ($2.2 billion), intended as a backstop for just this occasion, to ensure its deficit target is met. The structural problems behind the shortfall are another matter entirely.

China: Exports up, imports (still) down

March saw China's exports rebound, exceeding estimates with a 14.2% increase year-over-year in dollar terms. Imports, on the other hand, continued their decline, falling -7.6% year-over-year in March, well below the expected figure. Some observers attributed the continuing fall in imports to U.S. tariffs, still in force even as China and the U.S. continue their detailed negotiations over a trade agreement.

Oil: Shale

The announcement of Chevron's purchase of Anadarko Petroleum, a company prominent in the Permian Basin, is the market's most recent indication that shale is a key component of the global oil markets. The deal gives Chevron a major boost in crude-oil and natural gas production, bringing the combined entity's daily output for 2018 to 3.396 million barrels equivalent, approaching that of top producers (Exxon's 3.833 million barrels and Shell's 3.666 million barrels). The deal underscores the value generated by the year's strong prices for crude oil, now standing at $71.49 (Brent) and $64.07 (West Texas Intermediate)1 per barrel, and the profitability of the industry overall when the price of oil is strong.

1 Source: Bloomberg, as of April 12, 2019, 1:00 PM ET

All prices Source: Bloomberg, as of April 12, 2019, unless specified otherwise.

... CHART OF THE WEEK:

U.S. Growth: Lenders’ Lament?

Are Bank Lending Officers Getting Bearish?

weekly chart of the week

Chart courtesy of Brandywine Global. Source: Bloomberg, as of 1/31/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • There's a lively debate in financial markets about how much the strong growth shown by the U.S. economy in 2018 will continue this year and the next.
  • The ranks of the worried grew when the FOMC backed away from anticipated rate hikes and scaled back plans to sell off its inventory of Treasuries and mortgage-backed securities.
  • One unintended consequence, however, appears to be the impact on banks’ willingness to make business loans. 
  • Given that the Fed's new dovishness can be read as a signal of an upcoming economic slowdown, it's logical for bank lending officers to consider tightening their standards to avoid more vulnerable companies. That could be inadvertently make matters worse just as the economy's needs greater liquidity. 
  • Indeed, the most recent quarterly Fed survey of bank lending officers shows bankers lending to larger commercial and industrial (C&I) businesses are already making this adjustment -- a sharp turn from the relatively easy stance that started two years ago. As of the January 31 survey, a net 2.8% percent of these lenders reported increased scrutiny of their loans.
  • Brandywine Global observes that this tightening can be considered a bearish signal for the economy but in the context of other signals, both bearish and otherwise.
  • However, the time lags between a dovish turn and a change in the overall economy could make lending and investment decisions for businesses even more challenging than in more settled times, as they attempt to invest just as banks' caution increases.
  • Of course, the notable reduction in trade tensions between the U.S. and China, as well as early signs that a chaotic Brexit may have been delayed, it's possible that overly cautious bankers could be missing opportunities to participate in a contrarian resurgence of growth.   

The chart:

  • The chart shows findings from the Federal Reserve's quarterly Survey of Bank Lending Officers, between January 31, 1994 and January 31, 2019. The data presented are for U.S. domestic lending officers calling on medium-to-large commercial and industrial (C&I) businesses.


DEFINITIONS:

Brent and West Texas Intermediate (WTI), are major trading classifications of crude oil that serves as a major benchmark price for purchases of oil worldwide.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed), which is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.


Please note:

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.

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.
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.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
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.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
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.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

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.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

8 April 2019

“The remaining issues [on trade] are all hard nuts to crack.”

- Xinhua, China's government news service

THE WEEK IN REVIEW...

U.S. Jobs: Back on track

March saw job growth beat expectations, up by 196,000 vs. a revised 33,000 gain for February. That brought the rate of job growth back in line with its long-term trend of about 180k per month, recessionary periods notwithstanding. Headline unemployment stayed steady at 3.8%, extending a low last seen in the late 1960s.

Average hourly wages, however, grew a slightly less-than-expected 0.1% in March, bringing the year-over-year rise to an also-below-consensus 3.2%. And the overall participation rate fell slightly to 63.0%, largely due to drops among the 55-64 and 55-and-older groups.

Markets took the data in stride, with the yield on the 10-year Treasury returning to Thursday's level of about 2.515% after a brief spike. One explanation for the mild market reaction: the strength of job growth reduced the perceived need for a recession-preventing rate cut by the Fed during the rest of 2019.

Germany: Manufacturing angst

Factory orders for February fell -4.2% since January, vs. an expected growth of 0.3% –generating concern both in Germany and in Europe overall about the prospects for future growth. Year over year, the disappointment was worse: off by -8.4% vs. an expected -3.1%. The blow was softened somewhat by figures for current production; overall industrial production rose 0.7% in February vs. January, slightly above expectations; year-over-year, the figure was -0.4%, but still stronger than the expected 1.4%. Earlier in the week, Germany's Mechanical Engineering Industry Association cut its growth forecast for the year in half, to 1%.

Greece: Performance bonus

Eurozone finance ministers approved the release of €1 billion ($1.1 billion) of funds to Greece, ending the most recent debate over whether the country is sticking to its agreements on economic reforms made during the most recent bailout.

The irony: The funds come from profits earned by Europe's central banks on Greek government bonds during the country's debt crisis.

At the center of the disagreement was a reform by Greece restricting banks' power to repossess homes. Eurozone finance ministers had worried that protections for homeowners could threaten Greece's fragile banks, which have the highest ratio of nonperforming loans in Europe.

Brexit: Moving the goalposts

Prime Minister Theresa May's latest ask of the European Union is to move the "hard Brexit" deadline from this Friday, April 12 to June 30, to allow time for negotiations with Labour's Jeremy Corbyn over UK proposals for a further delay of Brexit’s implementation The "EU27” – the European Union's 28 members minus the UK – are scheduled to meet on Wednesday, two days before the April 12 deadline, to decide on next moves.

Prime Minister May's proposal also included a request to avoid participation in the May 23 elections for European Parliament, which she described in her letter to the EU as "…in the interests of neither the United Kingdom as a departing Member State, nor the European Union as a whole…", while acknowledging that the legal obligation to participate is still in force.

All data: Source Bloomberg, as of April 5, 2019, unless otherwise specified.

... CHART OF THE WEEK:

Rates: The Homebuilder Effect

weekly chart of the week

Chart courtesy of ClearBridge Investments. Source: ClearBridge, Bloomberg as of 4/4/2019. 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:

  • Housing accounts for roughly 10% of the US economy, and a significant part of that is the activity of homebuilders.  It’s also one of the most rate-sensitive sectors, as anyone who’s considered buying a house or apartment can attest.
  • But long-term fundamentals may matter more when evaluating the prospects for homebuilding stocks going forward – which appear quite strong now, as ClearBridge Investments points out in a recent article.
  • On the one hand, demand for new homes has yet to rise to its normalized level of about 1.5 million units per year.
  • Supply is also a positive. Investment in the housing sector collapsed in the wake of the 2008 financial crisis – as the supply of mortgages dried up along with the unravelling of the mortgage-backed debt instruments that backed them.
  • The result has been a perceived deficit of available housing – at the same time housing demand is accelerating as millennials reach their 30s and job growth continues to rise.
  • These favorable fundamentals may be behind the rapid recovery of the homebuilder stocks after rising mortgage rates beginning in the second half of 2018 triggered a dramatic selloff, as well as a pause in housing starts.
  • The Fed’s about-face on rate increases in early 2019 was clearly reflected in the sector’s rebound.
  • Even now, with a number of homebuilder stocks trading at below book value even after the run-up so far this year, ClearBridge believes the sector could still be worthy of further examination.

The chart:

  • The chart shows, for the period August 1, 2018 to April 4, 2019, the gains/losses of the S&P 500 Index and the ISE Exclusively Homebuilder Index.

DEFINITIONS:

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The ISE Exclusively Homebuilders Index includes residential construction companies and prefabricated house manufacturers.

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


Please note:

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.

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.
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.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
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.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
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.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

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.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

1 April 2019

"It was a simple thing they had to do and they haven't got it right. If there was another war we'd be in trouble with this lot in charge."

- Pro-Brexit demonstrator outside Parliament

THE WEEK IN REVIEW...

U.S. Consumers: Not Feeling it

Consumer purchases, accounting for some 70% of the U.S. economy, disappointed in January, rising 0.1% vs. December 2018, vs. an expected 0.3%. Core consumer inflation was also soft, rising only 0.1% vs December and 1.8% vs. January 2018 – well short of the Fed's often-stated goals of 2%.

Final figures for overall economic growth in Q4 also fell short, at a downwardly-revised 2.2% annualized rate. The downbeat tone of the figures so far suggests that the final growth figures for the just-ended Q1 could disappoint as well. All of which suggests that the Federal Reserve's newly-accommodative stance may be appropriate given current realities – and could become even more dovish should future figures continue to falter.

European Banks: Tiering up?

The current negative rate "paid" by the European Central Bank for deposits from commercial banks (-0.4%) is seen by many as threatening the profitability – and even solvency – of Europe's already-troubled banks. One suggested solution includes "tiered" rates for to offer some relief to the more troubled categories of banks. Though discussions on the subject are continuing within the ECB, the conversation so far remains theoretical. But it may be worth remembering that negative interest rates were once also considered unlikely, if not impossible, in practice.

UK- Europe: Brexit Breakdown

With Friday's 344-286 vote against adoption of Prime Minister May’s negotiated agreement between the UK and the EU, which would have delayed implementation until May 22, the timetable for finding any other form of withdrawal agreement has been thrown into disarray. The next key date is now April 12th, by which time the EU requires an agreement with the UK on how to continue discussions. With many believing that requirement won't be met, the prospects for a "no-deal" Brexit by that date have caused the EU to schedule an emergency meeting for April 10.

Sweden: Borrowing Time?

Dependent on global trade for about half its GDP, Sweden's economy is vulnerable to the current slowdown in global trade. At the same time, the country's debt load continues to fall, and is now projected to fall below the 30% level within the next two years, the country's lower limit of 30% This unusual situation has prompted the country's largest trade union group to exert pressure on the government to expand its borrowing and social spending – which could be challenging to the current right-wing majority in Parliament. Even former Prime Minister Goran Persson, widely known as an opponent of deficit spending, acknowledged that current "very low" low interest rates make borrowing a different matter than during the country's debt crisis of the 1990s.

All data: Source Bloomberg, as of March 29, 2019, unless otherwise specified.

... CHART OF THE WEEK:

UK Stocks: Brexit Blues


Chart of the week

Chart courtesy of ClearBridge Investments. Source: Bloomberg, as of 3/28/19. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • For better or worse, the Brexit referendum allowed UK voters to express their opinion about the UK leaving the European Union.
  • Now, in the shadow of the original March 29th deadline, equity markets have been rendering their own opinion on the impact of the departure – and the likelihood of its taking place on schedule, if at all.
  • The FTSE 100 Index of UK stocks has risen a cumulative 15.6% since the eve of the vote, substantially less than the 25.5% rise of global equities as a whole . Stocks of companies dependent on the local economy have contributed heavily to the underperformance of the UK market.
  • In terms of valuation, ClearBridge Investments estimates that on a sector-adjusted basis, UK equities have retreated to lows last seen during the market downturns of 2001 and 2008.
  • Of course, most aspects of Brexit have so far defied prediction – or short-term analysis. But markets wary of uncertainty appear to have taken that uncertainty on board, at least for now.

The chart:

  • The chart shows, for the period June 22, 2016 through March 28, 2019, the performance of the FTSE 100 Index of UK stocks, and the MSCI ACWI Index of stocks in developed and emerging countries.

DEFINITIONS:

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange.

The MSCI ACWI Index is free-float weighted, including both emerging and developed world markets.


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. 
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.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
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.
In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

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.
© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

Weekly Market Snapshot

25 March 2019

“I don’t think we want to become dependent on China as a customer in the long term"

- U.S. Agriculture Secretary Sunny Perdue

... The week in review:

Fed: Connecting the Dots

As of March 20, the FOMC has turned resolutely and unanimously dovish.

The Fed's consensus forecast for rates – the carefully-watched "dot plot" – now shows no hikes for the rest of 2019 and only one in 2020 – a substantial downward turn from December's map. The forecast for the economy was also pulled back, to 2.1% for this year and 1.9% for 2020, both reduced by 0.1 percentage point. And the schedule for reducing the Fed's holdings of Treasuries and mortgage-backed securities now calls for a halt in September.

Financial markets have reacted in line with the new outlook. In fact, the Fed Funds futures market now trades as if there's a 49% probability of the Fed actually cutting its benchmark rate by December 11, 2019, the date of its last meeting for the year. Yields for 10-year Treasuries have fallen to 2.471%, a low last seen in January 2018 – that's after reaching a high of 3.237% as recently as November 8, 2018. Two- and five-year Treasuries now yield a slightly-inverted 2.288% and 2.280 respectively. In equities, the S&P 500 rose as much as 1.7% to 2860.31 before pulling back slightly at the end of trading on March 21.

Explore insights on the Fed by Western Asset's John Bellows

Brexit and the EU: Terms and timelines, for today

The European Union (EU) gave the UK's Theresa May an extension from the March 29th date on which the UK and the EU were to go their separate ways in a "no-deal" departure. The new arrangement represents a shift by Prime Minister May, and a challenge to pro-Brexit hardliners.

The deal

The UK now has two additional weeks, ending April 12. But the devil is in the details. If UK lawmakers don't endorse her Brexit deal next week, May will have until April 12 to decide whether to leave without an agreement or request a much longer extension and propose clear plans on how the extra time granted would be used.

The leverage

That set of conditions puts political pressure on pro-Brexit hardliners, who will have to choose between backing May's already-negotiated deal or being stuck in the EU for possibly much longer than April 12.

That's because if the twice-defeated deal gets passed, the EU will let the UK stay in the EU until May 22 to wrap things up. But if the agreement is voted down, May will have to decide to ask for a longer extension, perhaps until the end of 2019.

The dates

Why April 12 and May 22? April 12th is the cut-off date for the UK to decide whether it will take part in the elections for the EU's parliament, and May 22 is the last day before voting starts. Voting for its parliament immediately before departing from the EU is viewed by all as worse than pointless; A departure deadline until the end of 2019 would, at the very least, allow for UK representation during that period, if not beyond – depending on the eventual outcome of presumed continued negotiations.

Read Brandywine Global's perspective on the pre-Brexit UK economy

All data: Source Bloomberg, as of March 22, 2019, unless otherwise specified.

... CHART OF THE WEEK:

U.S. Economy: Taking it Easier

Chart of the week

Chart courtesy of Western Asset. Source: Bloomberg, as of 3/20/19. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

Insight from Western Asset's John Bellows on the possible next move by the Fed.
 

  • The Federal Reserve’s (Fed) March 20 decisions, more dovish than anticipated by many, put a spotlight on the impact of financial conditions on the overall economy.
  • The worries toward the end of 2018 were that the Fed would continue to raise its target interest rate and stick to its planned selloff of the Treasury bonds and mortgage-backed securities it had accumulated over the past decade in reaction to the 2008 financial crisis.
  • But the last week of 2018 saw a distinctly dovish shift in the Fed's rhetoric and was followed by two increasingly dovish FOMC meetings.
  • Based on the shift in overall financial conditions, shown in the accompanying chart, the FOMC's change in stance since the end of the year has had the desired effect so far, changing overall expectations of the next interest rate moves from upward to flat – if not outright downward.
  • It remains to be seen whether the change in expectations will have the effect of supporting the flagging growth reflected in the Fed's downwardly-revised economic forecast and its consensus projection of the path of its own rate stance.

Inflation vs. recession? See why ClearBridge Investors is concerned about wage growth

The chart:

  • The chart shows, for the period Jan 2, 2014 through March 20, 2019, the Goldman Sachs U.S. Financial Conditions Index.

DEFINITIONS:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Reserve’s dot plot shows the projections of the 12 members of the Federal Open Market Committee (FOMC) on where they think fed funds rate should be at the end of the various calendar years shown, as well as in the long run—the peak for the fed funds rate after the Fed has finished tightening or “normalizing” policy from its current levels. The dot plot is published quarterly.

A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.

The Goldman Sachs U.S. Financial Conditions Index tracks changes in interest rates, credit spreads, equity prices and the U.S. dollar, reflecting changes in the investing environment, which could potentially weigh on economic output.


Please note:

Prior to 29 March 2019, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority.Subject to regulatory approval as of 29 March 2019, this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, 14 Shelbourne Road, Ballsbridge, Dublin 4. DO4 EP27.

Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

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.

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.

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.

U.S. Treasury Inflation Protected Securities (“TIPS”) are bonds that receive a fixed, stated rate of return, but they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S. city average of the all-item consumer price index for all urban consumers, published by the Bureau of Labor Statistics). TIPS, like most fixed income instruments with long maturities, are subject to price risk.
Less 

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 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

18 March 2019

“I have to ration [bullets]. It’s getting too hard to keep up”

- Street gang member in Caracas, Venezuela

... The week in review:

Brexit: The Paradoxical Pound

The UK House of Commons voted on Thursday against the prospect of a “no deal” Brexit; another vote is scheduled for Tuesday, March 19 on empowering Prime Minister May to formally request from the European Union (EU) a delay in the onset of Brexit on March 29, just under two weeks away.

Against that deadline, May continues to vigorously lobby for support from pro-Brexit members of parties as well as her coalition partners, Northern Ireland's Democratic Unionist Party.

Paradoxically, the currency markets appear to view the last-minute rush as a positive reduction in uncertainty, despite the underlying issues – especially the UK-Irish border "backstop" – remaining unresolved. So far this year, the British pound is the strongest major currency against the U.S. dollar, up some 3.8% since the end of 2018, and spiking from the previous day’s low of $1.3005 to $1.338 to the dollar immediately after the Commons vote to reject the prospect of a no-deal Brexit.

EU leaders have sent mixed signals about their willingness to extend the deadline, especially with no visible prospect of a resolution on the "backstop”; recent optimism about the British pound has puzzled some observers.

Italy: China Lends a Hand

Italy's government is considering becoming the first G7 country to join China's wide-ranging "Belt and Road" (BRI) global development program.

Unlike the BRI projects in Asia and Africa, which borrow directly from China's internal infrastructure banks, borrowing for the program would come from the China-led multilateral Asian Infrastructure Investment Bank (AIIB). That could make Italy's joint proposal more palatable to the EU, since AIIB projects are open to multilateral bids from non-Chinese contractors, unlike China's domestic infrastructure banks, which rely on Chinese labor – a sore point for pro-union parties within Italy's most recent coalition government. Progress on these agreements would be welcome to both countries – especially if Memoranda of Understanding could be ready for signing during President Xi Jinping's visit to Rome on March 22.

U.S. Economy: Softening Data

February's industrial production figures disappointed slightly; manufacturing production also fell short, down for the second month in a row at -0.5% for February and a revised 0.5% for January. Capacity utilization also fell short of expectations at 78.2%, down slightly from revised figures for January. But the largest downside surprise was in the New York Fed's regional manufacturing gauge for March, which fell to its lowest level since May 2017– though remaining in positive territory since crossing over to the plus side in November 2016.

Positive findings were modest at best: the job openings report for January was slightly stronger than expected, and March consumer sentiment beat expectations slightly – though the sentiment survey, conducted by the University of Michigan, also showed a post-recession average low of 15.5% chance of losing a job they or their spouse would want to keep.

China: Agreeing to Agree

The recent delay in the U.S. imposition of additional tariffs on exports from China accompanied an agreement on currency policy and allowed for further talks. Both parties agreed that any meeting between Presidents Trump and President Xi to sign agreements will take place no earlier than April.

Indications of progress could be found in China's recently concluded National People's Congress, during which legislation was passed eliminating the requirement for foreign enterprises to transfer proprietary technology joint-venture partners and protect against "illegal government interference". Chinese Premier Li Keqiang described accompanying enforcement measures as "ensur[ing] violators have no place to hide". On the U.S. side, President Trump added "We are getting what we have to get" and voiced his personal expectations that negotiations should wrap up within four weeks.

All data: Source Bloomberg, as of March 15, 2019, unless otherwise specified.

... CHART OF THE WEEK:

Oil: The New World

Chart of the week

Source: Bloomberg, as of 3/14/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • The balance of power in the oil and gas markets has changed dramatically since OPEC was founded in 1960.
  • Booming shale oil production has propelled the U.S., a non-member, into a leading role whose influence over global supply and price is arguably comparable to Saudi Arabia itself. Indeed, the U.S. actually out-produced the kingdom for several months in 2018.
  • Smaller U.S. exploration and production (E&P) companies have been responsible for much of the leap, but as a group, their profitability – and their balance sheets – are highly leveraged to the price of crude. Many were driven out of business as the price plummeted from $110/barrell (bbl) in June 2014 to as low as $26.21 less than two years later, largely as a result of OPEC flooding the market, as legendary oil man T. Boone Pickens put it, "…to teach those shale boys a lesson".
  • But shale producers adapted, survived and thrived, transforming the global marketplace from dependence on exploration to demand-driven production – and making prices more stable – at least so far.
  • As a result of that relative price stability, exploration and production companies have been able to stabilize their capital investments, which were mostly spent on exploration, shifting to more predictable expenditures on building production capacity. That, in turn, allows them to provide more stable return of profits arising from higher oil prices directly to investors in the form of dividends or partnership income – a radical change from the boom-or-bust nature of these businesses.
  • All of which gives most participants in the global oil market a vested interest in stable prices at a profitable level, which may help to explain the relative calm rise in crude prices since the beginning of 2019.
  • As seen in the chart, prices rose unsteadily in the beginning of 2018, falling as the U.S. embargo on Iranian oil cut in in Q4.  But since OPEC and Russia began to cooperate in enforcing OPEC's price support via volume reduction, prices have both risen to more mutually profitable levels and become less volatile.

The chart:

  • The chart shows the spot prices of Brent and West Texas Intermediate (WTI) crude oil in U.S. dollars from the beginning of January 2018 to March 14, 2019, along with the difference in price between the two, also in U.S. dollars.


DEFINITIONS:

G7 refers to Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

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 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.


Please note:

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
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.

Important Information
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.
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.
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.
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