Weekly Market Snapshot

14 August 2017

“Military solutions are now fully in place, locked and loaded, should North Korea act unwisely.”

– President Donald Trump

THE WEEK IN REVIEW...

Global crude oil: Tug of war One key measure of the tension between supply and demand last week was the price differential between Brent and West Texas Intermediate (WTI) crude-oil -- $3.38 on Friday ($51.60 – $48.22), wider than in March, when OPEC’s December 2016 production discipline broke down. The differential reflects increased production by the U.S. and a recovery of Canadian output, which held WTI prices back vs. Brent, a measure of European pricing.

Another measure can be seen in industry announcements. The International Energy Agency reported oil supply rose by 520,000 barrels (bbl) a day in July, to 98.16 million bbl/day, which was also 500,000 bbl above last July’s figure. The IEA also reported OPEC’s output rose by 230k bbl/day to a new high of 32.84 million bbl/day—in line with OPEC’s own announcement. The IEA reported OPEC’s compliance with its own agreement fell to 75%, the lowest level this year, due to higher output from Iran, Equatorial Guinea, Gabon, Algeria and the United Arab Emirates.

But despite the increase in supply, Brent crude has remained above the psychologically important $50 price since mid-July, causing the IEA to renew its plea for a market more evenly balanced between demand and supply.

Venezuelan bonds: Not at any price? Credit Suisse took the unusual step of banning its traders from dealing in a particular batch of Venezuelan bonds, not wanting to be seen as supporting that country’s increasingly embattled government. Venezuela’s state-owned oil company, PDVSA issued bonds earlier this year to help it invest in its own badly-neglected production infrastructure. The issuance was greeted by protests both within and outside the country, and became widely known as “hunger bonds” because of the country’s widespread food shortages, which the bonds would in no way alleviate. Goldman Sachs and Nomura, two purchasers of these bonds, were treated badly by the press and by pro-democracy forces.

Adding to the geopolitical issues facing the country, turns out that the government-owned oil company PDVSA has been the beneficiary of billions of dollars from Russia and Russia’s oil company, Rosneft, in exchange for future deliveries of oil. The Venezuelan company has also been negotiating over selling ownership interests in a number of productive petroleum projects to the Russian company, thereby raising cash that would be available to pay the interest on the newly-issued bonds, as well as on other outstanding obligations. This is over and above the agreements with China to sell some of Venezuela’s flagging oil exports.

U.S employment: Demand vs. supply The most recent monthly employment report showed Americans are less likely to be laid off than at any point in at least 50 years; For every 10,000 people in the workforce, 66 claimed new unemployment benefits in July. The previous low point, 83 per 10,000, was reached in April 2000, near the height of the tech boom. According to one employment benefits consulting firm, the reasons are clear, ” If you have a big segment of the workforce winding down due to retirement, why would you let anyone go?”

... CHART OF THE WEEK:

International stocks: Value comeback?


Chart of the week

Source: Bloomberg, as of 7/31/2017. 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:

  • Outside the U.S., value stocks significantly outperformed their growth counterparts for the 12-month period ending July 31, 2017, as measured by the MSCI All Country World Excluding US Value and Growth indexes.1
  • That’s a major reversal of the trend that’s prevailed over the past decade and particularly during the last 3 years, when international growth stocks held a notable performance advantage.
  • Could this be the start of a long overdue comeback for international value?
  • If you accept the premise that comparative performance tends to eventually gravitate back to the long-term average (i.e. reversion to the mean), this looks like a likely possibility. That’s because over a long period of time, international value has outperformed international growth2, not the other way around.
  • But beyond that principle, there’s also the reality that the beginning of the end is now in sight for the extraordinary monetary accommodation that has helped fuel growth’s outperformance in recent years.
  • Improving global economic growth may help value’s case, too—since in principle it favors earnings growth in cyclical sectors—such as Financials and Energy, as well as commodity-producing companies—which comprise much more of the international value index than the international growth index.
  • The converse is true as well; if defensive (non-cyclical) sectors like Consumer Staples underperform as growth accelerates—and/or if investors were to shy away from more highly valued tech companies—then that could also favor international value, because the growth index has much heavier exposure to those areas.
  • Europe is also likely to play a notable role in any comeback for international value as it is heavily exposed to energy- and commodity-producing companies as well as financials.
  • To learn more about the tailwinds that could drive international value stocks, read the latest from ClearBridge Portfolio Manager Safa Muhtaseb.

The chart:

  • The chart shows average annual returns of the MSCI All Country World Excluding US Value and Growth indexes for the 1-, 3-, 5- and 10-year periods ended 7/31/2017.

1 Source for all data is Bloomberg. For the 12-month period ending 7/31/17, the MSCI All Country World Excluding US Value Index generated a total return of 22.9% compared with just 16.2% for the MSCI All Country World Excluding US Growth Index. In the U.S., the Russell 1000 Growth Index generated a total return of 17.9% compared with 13.7% for the Russell 1000 Value Index.
2 For the 20-year period ending 7/31/2017, the MSCI All Country World Excluding US Value Index generated a total average annual return of 5.52% compared with 4.13% for the MSCI All Country World Excluding US Growth Index.


DEFINITIONS:

Mean reversion is a theory suggesting that prices and returns eventually move back towards the mean or average.

The Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) Excluding US is a market capitalization weighted equity index of stocks traded in 46 world markets. It does not include the stocks of companies that are based in the USA.

The MSCI All Country World Excluding US Value Index includes those companies in the MSCI All Country World Index (ACWI) Excluding US chosen for their value orientation.

The MSCI All Country World Excluding US Growth Index includes those companies in the MSCI All Country World Index (ACWI) Excluding US chosen for their growth orientation.

Growth stock refers to the stock of a company whose earnings are expected to grow at an above-average rate relative to the market.

Value stock refers to the stock of a company that is believed to trade at a lower price relative to its fundamentals (i.e. dividends, earnings, sales, etc.).


Important Information:

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

Outperformance does not imply positive results.

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

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.

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.

Weekly Market Snapshot

7 August 2017

"By any measure, real long-term interest rates are much too low and therefore unsustainable."

– Former Federal Reserve Chairman Alan Greenspan

THE WEEK IN REVIEW...

U.S. Jobs: Closely watched gains July’s 209k rise in non-farm payrolls was high enough above consensus forecasts to cheer many analysts. The same was true of the closely-watched labor participation rate, which rose slightly to 62.9%, driving the unemployment rate down to 4.3% from 4.4%. One other key number was also fairly strong; average hourly earnings rose 0.3% vs. June, bringing the year-on-year rate to 2.5%, better than expectations. The only clunker was the so-called underemployment rate, unchanged at 8.6%. This figure represents job-seeking workers without jobs, plus full-timers driven to part-time or less-than-desired jobs.

Fed-watchers are paying particular attention to these figures in the hope of handicapping the number and timing of the its next rate hikes – as well as the much-anticipated beginning of reductions in the central bank’s balance sheet, The latter is believed by many to start in earnest right after the September 19-20 meeting, economic conditions permitting.

U.S. Autos: Quality drives quantity After the U.S. industry’s latest brush with death in 2008, auto manufacturers got religion; today’s cars are miles ahead of only a few years ago in design, build quality and longevity. But longevity comes at a cost; now that US drivers have largely replaced their aging sub-par wheels, replacement buying has slowed dramatically. The result: auto sales fell 7% in July, compared with a year earlier. No doubt there are other causes as well; increased scrutiny of financing offered to would-be buyers with low credit scores among them. But the build-up of off-lease used car inventories isn’t helping matters; manufacturers are beginning to reduce manufacturing shifts and laying off workers this summer. It could be a difficult year ahead for automakers in the U.S..

German infrastructure: A bridge sub-par Germany’s underinvestment in infrastructure is beginning to show. At least one of the bridges across the Rhine, on a major trucking route between manufacturers and their customers, has been closed to heavy traffic since 2012. A second bridge was closed this past week between the industrial Ruhr Valley and one of the most important transport links with the Netherlands and its ports. One of the country’s development banks estimates the total infrastructure “investment gap” to be over €125 bn, €34 bn of which is for roads.

The issue is large enough to figure in Germany’s September elections; Chancellor Angela Merkel’s fiscal conservatism, including her party’s unwillingness to spend the country’s hard-earned surplus, has made her a target for the Social Democrat Party’s Martin Schulz.

... CHART OF THE WEEK:

U.S. High-Yield Bonds: Spread's the Word

U.S. Dollar-From weakness, strength?

Source: Bloomberg, as of August 2, 2017. 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:

  • As high yield U.S. corporate bond spreads tightened from the peak levels that prevailed in February 2016, the asset class has generated solid returns.
  • In fact, since the spread's peak value on February 9 of that year, the Barclays U.S. Corporate High Yield Bond Index generated a cumulative total return of 30.03% through August 2,2017.
  • Over that same period, the option-adjusted spread (OAS) of the index tightened by just over 470 basis points (bps) from 820 bps to 349 bps.
  • Behind the elevated spreads in February 2016: credit markets reflected the then-prevailing expectations of a global recession.
  • As those fears subsided, spreads tightened rapidly throughout the remainder of the year and have continued to do so this year.
  • At 349 bps as of August 2, 2017, the option-adjusted spread is near its lowest point since the end of the 2007-8 Global Financial Crisis (323 bps).
  • On the one hand, this level suggests that financial markets are quite optimistic about economic fundamentals and corporate balance sheets—an environment of moderate growth, low inflation and central bank caution has been a strongly favorable backdrop for the sector.
  • On the other hand, the latest tightening means that current investment opportunities are very issue-specific— because general spread compression within the asset class is more unlikely when spreads are already tight. 
  • In that kind of environment, simply buying the asset class via a passive investment strategy could expose an investor to some significantly overpriced sectors.
  • However, active managers that base investment decisions on the merits of specific issuers and the characteristics of individual securities have the flexibility to initiate positions only in those credits where valuations may be most attractive.

The chart:

  • The chart shows the option-adjusted spread of the Barclays U.S. Corporate High Yield Bond Index from 12/31/2015 through August 2, 2017.

DEFINITIONS:

The Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt, including corporate and non-corporate sectors. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets are excluded, but Canadian and global bonds (SEC registered) of issuers in non-emerging market countries are included. Original issue zero coupon bonds, step-up coupon structures, and 144-As are also included.

A basis point (bps) is one one-hundredth of one percent (1/100% or 0.01%).

A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.

An Option-Adjusted Spread (OAS) is a measure of risk that shows credit spreads with adjustments made to neutralize the impact of embedded options. A credit spread is the difference in yield between two different types of fixed income securities with similar maturities.


Important Information:

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

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

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

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

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.

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.

Weekly Market Snapshot

31 July 2017

"There is now no question mark over the world economy's gain in momentum”

- IMF chief economist Maurice Obstfeld, on its latest world economic forecast

THE WEEK IN REVIEW...

The Fed and inflation: Conceding the point The July 24-25 meeting of the Federal Open Market Committee (FOMC) was mostly uneventful, as expected. But the exception was noteworthy: the subtle but clear shift in tone about the FOMC’s attitude toward the below-target rate of inflation showed increased concern that reaching the target 2% rate might prove more difficult than previously believed. The new tone was broadly in line with the U.S. bond market’s signals; the implicit rate of inflation ten years out was about 1.8% 1 and hadn’t reached levels above 2% since March of this year.

The matter is more than technical; at stake is the date of the Fed’s next rate hike. Broadly speaking, the lower the inflation rate the later a hike will likely happen. Which, in turn, affects financial markets in much of the world – from emerging-market bonds to the cost of investment capital for U.S. corporations. If the current U.S. growth rate is considered fragile, later is better. But savers wishing to keep money in insured savings accounts may have a different opinion.

U.S. corporate earnings: Season’s greetings With 278 of the 500 companies in the S&P500 reporting quarterly earnings so far, results have been better than recent expectations, in both sales (1.3% better) and earnings (5.1%). While the “beat” could be the result of lowered expectations in advance of these announcements, the positive sentiment generated by this aspect of corporate news flow puts a brighter spin on the S&P500’s strong valuation of about 21.9 times current earnings and 18.5 times estimated earnings for the end of 2018.2

China: Grey Rhinos on the march China's official media have taken to describing certain kinds of financial events not as unforeseeable black swans, but as grey rhinos,3 highly probable, high-impact threats people should see coming, but don’t. While it’s unclear precisely which issues are raising the sense of urgency suggested by this language, it’s often been mentioned, by official sources, in the same breath as the country’s burgeoning corporate, municipal and personal debt burden.

Crude oil: Linkage Crude oil markets have made a U-turn since the middle of June, with West Texas Intermediate (WTI) looking to break above $50 per barrel (bbl) and Brent breaking through to $52.42 – levels not seen since mid-April and mid-May, and then as they were headed downward instead of up. Along with the usual talk of declining inventories, an additional factor has resurfaced – a possible confrontation between the U.S. and Venezuela, as talk of embargos against the already-embattled country ratchets up both internal and external strife.

1 All prices Source: Bloomberg, July 28, 2017, 9:00 – 11:00 ET

2 Sources: Standard and Poors, Bloomberg

3 Source, People’s Daily (China), July 17 2017

... CHART OF THE WEEK:

U.S. Dollar: From weakness, strength?

U.S. Dollar-From weakness, strength?

Source: Bloomberg, as of 7/25/2017. 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, the U.S. dollar has weakened about 8% against a trade-weighted basket of major world currencies.4.
  • While many variables can contribute to the relative value of a currency—some less than obvious—this recent downturn has been widely attributed to three related factors: 1) improving global growth relative to the U.S, 2) changes in expectations about central bank policies—with greater prospects for tightening by the European Central Bank (ECB) and lower prospects for the U.S. Federal Reserve (Fed), and 3) political uncertainty in the U.S.
  • Consider eurozone growth: recent data suggests that 2Q17 could be the strongest quarter in more than six years, and explains why markets believe the ECB could soon shift to a less accommodative stance.
  • At the same time, stubbornly low inflation has markets reconsidering the Fed’s appetite for more rate hikes this year.
  • Whatever the causes, a weaker U.S. dollar could be beneficial for U.S. economic growth, since it makes U.S. exports cheaper to trading partners, all other things being equal.
  • Coupled with stronger global growth, a weaker dollar could therefore mean a brighter earnings outlook for U.S. companies that sell a lot of goods and services abroad.
  • That could have a ripple effect, improving the earnings outlook for companies that aren’t major exporters but do business with US exporters.
  • Investors looking to potentially capitalize on this shift may find it advantageous to consider active managers that can tilt portfolio allocations toward those companies that are possible beneficiaries

The chart:

  • The chart shows the daily closing price of the DXY U.S. Dollar Index from December 30, 2016 through July 25, 2017.

4Source for all data: Bloomberg as of 7/25/17.


DEFINITIONS:

The DXY Dollar Index measures the value of the U.S. dollar relative to the exchange rates of six major world currencies (the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc) which represent a majority of its most significant trading partners.

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

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.


Important Information:

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

A credit rating is a measure of an issuer’s ability to repay interest and principal in a timely manner. The credit ratings provided by Standard and Poor’s, Moody’s Investors Service and/or Fitch Ratings, Ltd. typically range from AAA (highest) to D (lowest). Please see www.standardandpoors.com, www.moodys.com, or www.fitchratings.com for details.

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

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.

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"):

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Weekly Market Snapshot

24 July 2017

“I will say what Margaret Thatcher used to say: 'We want our money back”

- France’s Finance Minister, Bruno Le Maire, on money the EU is seeking to collect from Britain in association with Brexit

THE WEEK IN REVIEW...

U.S. dollar: Victim or victor? The U.S. dollar has fallen -8.2%1 this year against a trade-weighted basket of currencies, and is down just under -10% against the euro. While U.S. pundits have been quick to blame recent disorder in Washington for the decline, there are more fundamental reasons for the descent.

Most prominent is a change in interest rate expectations on the short end of the yield curve – largely the result of Fed actions and comments. After three 25 basis point (bps) hikes since the beginning of December, Chair Yellen and her colleagues have shaded their optimism about the economy in light of stubbornly low inflation – leading some to wonder if another hike this year could be on hold. Currency traders may already have incorporated this doubt; after all, inflation has been below the Fed’s 2% target level for quite some time.

Add to that recent strength in the European economy and ECB President Draghi’s gentle but clear hints that a rate rise could be in the offing – factors which may be driving the euro higher against the dollar in particular.

National pride notwithstanding, a falling dollar is good for U.S. exporters – and in theory for wage and job growth. Which could come in handy, since a falling dollar also means more expensive imported goods for U.S. consumers. The falling dollar is also good for oil importers, since oil is priced in dollars, which are cheaper now. But it’s not so good for oil exporters like OPEC, which has several members badly in need of a financial boost.

ECB taper: No tantrum so far Last week’s European Central Bank (ECB) policy statement and press conference were carefully crafted to avoid controversy and sudden market reaction – perhaps due to the sharp moves resulting from the subtle signals from last month’s gathering of central bankers in Sintra, Portugal. That’s one possible reason for the ECB’s unchanged formal guidance about the future of rates and its bond-buying program.

That said, the statements by ECB President Mario Draghi about the timing of any future dial-back of its bond-buying program left the clear impression that the matter would be discussed by the ECB “in the fall”, which was heard by many as meaning at the regularly-scheduled ECB meetings scheduled for early September or late October. Like the U.S., Europe’s economies face stubbornly low inflation rates in the face of gathering signs of growth.

The issues are not just a matter of appearance. The ECB’s bond buying has put cash directly in the hands of struggling European companies, which have used it to rehire laid-off workers, and to restart projects, many of which are directly involved with improving some of Europe’s neglected infrastructure projects. Any reduction in this indirect subsidy could be felt immediately in employment; hence, the importance of ensuring that Europe’s economies can grow on their own before withdrawing this form of life support.

Brexit: Europe’s hardliners ascendant Last week’s second round of negotiations between the European Union (EU) and the U.K. on Brexit left little doubt that the EU intends to offer little to none of the “flexibility” that U.K. negotiator David Davis said he was seeking. The EU’s negotiator, Michel Barnier, summed up the session nicely: “I know one has to compromise in negotiations but we are not there yet.” Others were less gentle; France’s Finance Minister, Bruno Le Maire, used a hearing in the French parliament to talk about the financial settlement that is believed to be part of the eventual deal: "I will say what Margaret Thatcher used to say: 'We want our money back,"' referring to the estimated maximum €100 bn owed to the EU by the U.K.

1 All prices Source Bloomberg, July 20 2017, 7:00 – 11:00 ET

... CHART OF THE WEEK:

U.S. stocks: Is confidence enough?

Consumer confidence and small business optimism

Source: Bloomberg, as of 6/30/2017. 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:

  • June data shows consumer confidence and small business optimism remain solid—although both measures have softened a bit following post-election surges.
  • The Conference Board’s Consumer Confidence index came in at 118.9, off the recent peak of 124.9 in March, but well above the 20-year average of 92.9.
  • The NFIB’s Small Business Optimism survey was 103.6, below the January high of 105.9, but also above the 20-year average of 96.9.
  • These relatively high readings help explain why stocks are at record levels.
  • Yet elevated confidence levels are sometimes a warning sign.
  • History shows that when sentiment is high while economic fundamentals are weakening, a downturn could be ahead.
  • However, many indicators appear solid now. Unemployment is low (4.4%), inflation is benign (1.6%) and manufacturing activity is expanding (the June ISM Manufacturing PMI was a solid 57.8).
  • That, coupled with improving global growth, continued strength in corporate earnings and overall financial conditions that remain loose for this stage of the business cycle, arguably offers an optimistic backdrop for the equity markets.
  • Of course, that doesn’t preclude a sudden change in the weather. And with stock valuations generally elevated careful analysis is paramount to select attractively priced investments—a potential advantage for strategies managed by experienced stock-pickers.
  • For more about the trends that signal continued upside for stocks, read the latest update from ClearBridge Investment Strategist Jeff Schulze.

The chart:

  • The chart shows the monthly level of the National Federation of Independent Business’ (NFIB) Small Business Optimism Index and the Conference Board’s Consumer Confidence Index between June 2012 and June 2017.

Source for all data: Bloomberg


DEFINITIONS:

The Conference Board Consumer Confidence Index is a barometer of the health of the U.S. economy from the perspective of the consumer. The index is based on consumers’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income. The Consumer Confidence Index and its related series are among the earliest sets of economic indicators available each month and are closely watched as leading indicators for the U.S. economy.

The Conference Board is a US-based business membership and research association. The Leading Economic Index (LEI) for the US is designed to signal peaks and troughs in the business cycle.

The Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) for the US manufacturing sector measures sentiment based on survey data collected from a representative panel of manufacturing and services firms. PMI levels greater than 50 indicate expansion; below 50, contraction

The Institute for Supply Management (ISM) is an association of purchasing and supply management professionals, which conducts regular surveys of its membership to determine industry trends.

The NFIB Small Business Optimism Index is produced by the National Federation of Independent Business from data compiled in its monthly survey on small business owners that belong to the NFIB.

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


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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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