Weekly Market Snapshot

12 February 2018

Volatility: Mean Reversion "The most predicted selloff of all time."

James Bullard, President of the St. Louis Federal Reserve.

... The week in review:

Market Volatility: Mean Reversion The world's markets have been put to the test over the past week; U.S. equities moved solidly into the -10% "market correction" zone since the intra-day peak on January 26, 2018. The VIX Index was trading in the 40 range as of mid-afternoon Friday,1 levels not seen for 2½ years, since the correction of August 24, 2015. U.S. equity markets showed some differentiation, however; declines in the 11 industry sectors of the S&P500 ranged from -4.4% (Utilities) to -11.2% (Energy), suggesting that there were both general and sector-specific forces at work:

S&P500 Sector Performance and weights, Feb 5, 2018 (market open) – Feb 9 (1:30 PM ET)

Source: Bloomberg, 2/5/18 to 2/9/18. 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.

Another feature of note: Treasury yields rose nearly to pre-rout levels immediately after the expected first-days pullback; the intra-day low yield of 2.65% on Tuesday, Feb 6 was followed by a rebound to 2.875% on February 8, rather than staying in a more "risk-off," lower level.

Each market correction has its own characteristics; rationales fly freely when markets gyrate. Blame is put at the feet of slightly elevated wage growth; technical factors, including the S&P500 index breaching the 50-day and 100-day moving averages; short-volatility ETF liquidity; and equity valuations. Also worthy of consideration: the belated acceptance of a rising rate environment, which had been signaled years in advance by a carefully-communicating Fed. One thing is clear: After this past week, valuations are being rethought for several classes of assets.

Each market correction has its own characteristics; rationales fly freely when markets gyrate. Blame is put at the feet of slightly elevated wage growth; technical factors, including the S&P500 index breaching the 50-day and 100-day moving averages; short-volatility ETF liquidity; and equity valuations. Also worthy of consideration: the belated acceptance of a rising rate environment, which had been signaled years in advance by a carefully-communicating Fed. One thing is clear: After this past week, valuations are being rethought for several classes of assets.

1 All figures Source: Bloomberg, February 9, 2018, 1:45 PM ET

... CHART OF THE WEEK:

Inflation: Growth Calls the Tune

Chart of the week

Source: Bloomberg, Bureau of Economic Analysis, Federal Reserve, Feb 9, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The bottom line:

  • With markets suddenly volatile after years of calm, it's easy to be distracted from the basics that drive prices long-term – like inflation.
  • One key question now: Is inflation being driven by the threat of unsustainable wage growth. or are there more positive forces at work?
  • Since the Great Recession of 2008-9, one key worry has been the sluggishness of corporations' investment in productive capacity, which traditionally sets the stage for future growth.
  • In the years immediately following the 2008-9 slowdown, companies made up for the pause in growth by rebuilding capacity. That boost showed up in inflation expectations – the most common measure, the 5-year breakeven rate, stayed between 2.5% and 3.5% until the latter part of 2015.
  • As investment slowed down, inflation expectations fell as well – staying below the Fed's medium-term 2% target rate.
  • But as optimism, tax reform and expectations of a pickup in government spending all grew, investment picked up as well. Eventually, inflation expectations rose as well – with 5-year inflation expectations moving past 2% years in mid-January.
  • Only time will tell whether the boost in investment will continue in the face of the currently unsettled financial markets.
  • But it's important to keep in mind that one of the underlying drivers of the pickup in inflation is in fact a positive for economic growth in the medium to long term
  • It takes a fundamentals-based, active management approach to look past market volatility to focus on underlying economic trends, and to potentially put those trends to work on behalf of investors.

The chart:

  • The chart shows, between January 1, 2007 and February 2, 2018, 2018, the 5-year breakeven inflation rate as calculated by the Federal Rreserve and the 12-month moving average of the Bureau of Economic Analysis measure of private non-residential investment.


The 5-year, 5-year forward breakeven inflation rate is a market-based measure of expected inflation derived from "nominal" Treasury securities and their "real" counterpart


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

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

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

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

All investments involve risk, including possible loss of principal.

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

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

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

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

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

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

Weekly Market Snapshot

5 February 2018

U.S. Job Growth: Nature of the Beat "We’re totally maxing out"

- German businessman Ralf Schlesselmann, manufacturer of wooden shipping pallets.

THE WEEK IN REVIEW...

U.S. jobs: Nature of the beat… Friday’s jobs report for January 2018 beat expectations in some respects. But, it was one specific number that captured the attention of markets – mostly because it answered a key question in the inflation narrative: When will wages rise enough to drive growth forward and spur widely-desired inflation? The day’s answer: January 2018. Average hourly earnings rose 2.9% from the previous January, the highest growth rate since the Great Recession, and notably above both expectations and the previous month’s upwardly-revised 2.7% rate.

Market reactions were swift. The U.S. Treasury yield curve reversed some of its recent flattening, implying that the odds of a recession could be fading, at least for the day. The ten-year Treasury blew through 2.8%,1 for part of the day; the 30-year briefly moved through 3.09% before pulling back slightly to 3.06%.

U.S. stocks reacted strongly as well. Rather than taking the report as a sign of improvement in growth prospects, equities headed downward, as if taking to heart a potential rise in labor costs and pressure on profits. The S&P 500 fell about 1% intra-day, the Down Jones Industrial Average fell over 1.4%. Stocks were still ahead year to date as of mid-day Friday, but by not as much as they had been on Thursday; as of 1:00 PM on Friday, the S&P500 was up some 4.5% and the Dow was up 4.4% for the year.

The Fed: Nice finish Janet Yellen’s last FOMC meeting as Chair was unremarkable – which itself was a testament to her success in setting expectations clearly. The Fed Funds target rate remained at 1.50%; the decision to leave it at that level was unanimous. The most notable change in the statement was a shift in inflation expectations; instead of expecting rates to stay below 2% “in the near term,” the language read “expected to move up this year”.

Europe: Growing pains The 19-member eurozone grew 2.5% in calendar 2017, according to official figures. That’s the fastest full-year pace since the 3.4% rate of 2007, the year before the Global Financial Crisis.

That growth has been far from trouble-free. Within the larger 28-member European Union, the rate was uneven. The UK turned in a disappointing 1.5% growth rate for the year. And despite the rapid growth, euro-area inflation actually fell to 1.3% in January vs. December’s 1.4%.

Another growth-related challenge within the eurozone: industrial capacity. Germany grew at a 2.2% rate in 2017, the highest rate since 2011; consumer confidence is at its highest level since 2001 and tax revenue is rising. One notable bit of anecdata: a 100-year-old German manufacturer of wooden shipping pallets, an essential product for this export-driven economy, has an order book so full that it’s turning away new customers at the same time as adding workers.

11 All figures Source: Bloomberg, February 2, 2018, 1:00 PM ET

... CHART OF THE WEEK:

U.S. Stocks: Great(er) Expectations

Chart of the week

Source: Bloomberg, Standard and Poor’s, Federal Reserve, Legg Mason, Jan 25, 2018. Projections provided by Standard and Poor’s as of 1/25/18. 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:

  • Inflation and earnings are major market drivers – and expectations for both have a profound impact on today’s prices.
  • For inflation, financial markets provide a relatively clear signal about current expectations:  the “breakeven” inflation rate, which is the level of inflation implied by the difference in prices between regular and inflation-adjusted Treasuries five and ten years into the future.  
  • Not surprisingly, the Federal Reserve follows this signal closely, and produces its own estimate of these values. The Fed’s most recent figure – 2.0571% on January 26 – implies the Fed will be able to meet or beat its stated target of 2% inflation over the next five years.
  • Corporate earnings are more difficult to predict. But Standard and Poor’s does provide estimates for its S&P 500 Index, which now imply operating earnings2 for the index will grow at over a 16% annual rate by the time the current earnings season concludes – and will continue to grow at that rate or better for at least the following two years.
  • Corporate operating earnings are themselves affected by inflation, as costs of production rise. But at low to moderate levels of price growth, the effect can add to earnings rather than detract; inflation affects what companies charge for their products/services as well as the prices they pay..
  • But the effects of inflation on earnings vary widely, depending on a company’s quality; a well-managed balance sheet can generate operating earnings growth in a wide variety of conditions.
  • It takes an astute, analysis-driven investment manager to do the homework needed to tell the difference between beneficiaries of the current environment and those companies that are less able to change with the times.

The chart:

  • The chart shows, between January 1, 2011 and January 25, 2018, the 5-year breakeven inflation rate as calculated by the Federal reserve and the annualized growth rate for earnings of the S&P500 Index; also shown is the annualized growth rate of projected earnings from December 31, 2017 to December 31, 2019.

2 “Operating earnings” is defined as profit earned after subtracting from revenues those expenses that are directly associated with operating the business, such as cost of goods sold, administration and marketing, depreciation and other general operating costs. Operating earnings do not generally reflect the impact of stock issuance, borrowing or other non-operating factors.


DEFINITIONS:

Operating earnings is profit earned after subtracting from revenues those expenses that are directly associated with operating the business, such as cost of goods sold, administration and marketing, depreciation and other general operating costs.

The 5-year, 5-year forward breakeven inflation rate is a market-based measure of expected inflation derived from "nominal" Treasury securities and their "real" counterparts—inflation-protected TIPS securities.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.

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.


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

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

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

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

All investments involve risk, including possible loss of principal.

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

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

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

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

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

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

Weekly Market Snapshot

29 Janaury 2018

U.S. Dollar: Sound and fury… "It’s not something we’re particularly concerned about"

– Treasury Secretary Steve Mnuchin, on the value of the U.S. dollar

... The week in review:

U.S. dollar: Much ado It’s not that Treasury Secretary Mnuchin got it wrong when he said that a weaker U.S. dollar was good for the U.S. Rather, it’s that the statement was perceived as a change in U.S. policy toward the greenback. And after the 16% fall of the dollar vs. the euro1 over the past year, investors and others had been wondering if the decline reflected U.S. policy.

Rather, it appears that Secretary Mnuchin was merely stating the obvious – that a declining dollar could be additive to U.S. growth if it attracted investors and boosted U.S. exports – and could act to discourage imports, which could in theory also boost U.S. consumption of U.S. goods.

So why the fuss? Two reasons, one of which is that the concept of a strong dollar is perceived, rightly or wrongly, as a show of U.S. strength. That may have been part of the reason for the qualified denial by the White House.

The second reason, the dollar’s effect on the European Union, is arguably more important – and may explain European Central Bank (ECB) President Draghi’s reaction. The dollar’s fall is the euro’s rise – a hefty 20 U.S. cents over the past 12 months, to as high as $1.254 on Thursday. That rise drives down European manufacturing export competitiveness in favor of the U.S. and is a significant headwind for the ECB’s efforts to raise inflation along with growth. Since the ECB would like to normalize its interest rates sooner rather than later, any counter-inflationary force works against the plan.

So is the falling dollar against the euro part of some formerly-secret plan? More likely, the shift is the result of capital flows, as investments in the form of stock purchases head to Europe, where growth is even more visible than in the U.S., and interest rates are at record lows.

U.S. growth: Markets make the call At first glance, the 2.6% annualized GDP growth rate for Q42017 looked disappointing – having missed the consensus expectations of 3.0%. But consumer spending rose 3.8% and investments in business equipment rose solidly. The final figure was pulled back due to trade and inventories – both famously volatile. With respect to trade, domestic demand boosted imports, but exports softened, highlighting the impact of trade on growth. A falling U.S. dollar might soften the blow in subsequent quarters.

1 All figures Source: Bloomberg, Jan 26 2018, 2:00 PM ET

... CHART OF THE WEEK:

v

Chart of the week

Source: Bloomberg and Legg Mason, Jan 25, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment

The bottom line:

  • There’s no free lunch in the bond market: the question for investors is whether the tradeoff is worth the trade.
  • Example: the potential for higher return by shifting a portfolio toward lower-quality credit.
  • In 2017, investors in U.S. Treasuries, considered to have no credit risk, would have earned an average total return of about 2.3 percent – a rock-bottom level.2
  • How much could those investors have gained in 2017 from riskier bond sectors? Non-Treasury bonds issued by U.S. government agencies – with very slightly more credit risk – would have boosted total return somewhat, from 2.3% to 2.98%.
  • Corporate bonds would have provided a larger pickup. Moving from Aaa-rated to Aa-rated corporates would have boosted total return from 2.41% to 4.23%; to A-rated, 5.98%; to Baa – still investment-grade territory but clearly higher risk – to 7.45% - a fairly large return pick-up. But also a fairly large pickup in risk.
  • It’s hard for a typical investor to determine if they’re being paid enough to take on the levels of risk that go with these yields on a sector level — and virtually impossible on a security level. 
  • What’s more, passive investments driven by broad indexes may involve more risk than is immediately apparent — which begs the question of whether the return they offer is sufficient compensation.
  • Active bond managers, on the other hand, can vet risks at the market, sector and security level and evaluate the tradeoffs with a critical eye — valuable flexibility at a time when the overall interest rate environment is changing.

The chart:

  • The chart shows, between January 1 and December 27, 2017, the yields, total returns and durations of selected U.S. government-issued and corporate-issued bonds, at selected levels of credit risk.

2 Source: Bloomberg, Jan 24, 2018. All figures for total return, yield and duration are for the Bloomberg Barclays Indexes representing their respective fixed income categories or subcategories.


DEFINITIONS:

Duration is a measure of the price sensitivity of a fixed-income security to an interest rate change. It is calculated as the weighted average of the present values for all cash flows, and is measured in years. Modified duration incorporates the fact that bond prices and yields move in opposite directions.

The yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

The Bloomberg Barclays U.S. Aggregate Aaa Total Return Index covers the universe of Aaa-rated, fixed-rate taxable bonds.

The Bloomberg Barclays U.S. Aggregate Aa Total Return Index covers the universe of Aa-rated, fixed-rate taxable bonds.

The Bloomberg Barclays U.S. Aggregate A Total Return Index covers the universe of A-rated, fixed-rate taxable bonds.

The Bloomberg Barclays U.S. Aggregate Baa Total Return Index covers the universe of Baa-rated, fixed-rate taxable bonds.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury, excluding Treasury bills due to maturity constraints.

The Bloomberg Barclays US Agencies Total Return Total Return Index covers U.S. government debt issued by federal agencies.


IMPORTANT INFORMATION:

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

All investments involve risk, including possible loss of principal.

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

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

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

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

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

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

Weekly Market Snapshot

22 January 2018

U.S. Jobs chasing workers? "Immigration is as close to a free lunch as there is for America."

– Minneapolis Federal Reserve President Neel Kashkari

THE WEEK IN REVIEW...

U.S. jobs: Devil’s in the details Thursday’s unemployment claims figure – 220k for the week ended January 13 – was the lowest since February 1973, nearly 35 years ago. The Federal Reserve’s January economic survey, the “Beige Book”, reported businesses in most of the Fed’s 12 districts having trouble finding qualified workers and that labor shortages were constraining economic growth “in some cases”. It also found evidence of pay raises, especially where workers are scarce.

But the story isn’t that clear-cut. The Labor Department’s Job Openings report showed the number of available jobs slipping in November month-on-month after having reached a record high in September. And the closely-followed “quits rate” has barely moved since a year ago – 2.1% vs. 2.0%. In addition, the claims-reporting process in Puerto Rico, population over 3.4 million, has still not returned to normal, according to the Labor Department. All this suggests that Thursday’s claims report was statistically much more “noisy” than usual – and a somewhat suspect barometer of economic growth.

Oil: Look out below The International Energy Agency (IEA) expects “explosive” growth in U.S. oil output in 2018, according to the report it issued Friday – just before OPEC and its allies (including Russia) prepared to meet in Oman. There’s much for them to consider. Crude oil prices are up over 60% from their August 2016 lows1. As a result, U.S. shale oil producers are expected to enter the market in strength. At the same time, the cartel must find a way to balance between supplying much-needed revenue to Saudi Arabia and Russia, among others -- and keeping their own production in line with previously-agreed limits. All of which reminds that the cure for high oil prices – is high oil prices.

China: Strong year Overall economic growth in China picked up in Q4. The economy expanded at an annualized 6.8% vs the year-ago quarter - the same rate as Q3, and slightly better than consensus expectations. For the full year 2017, growth came in at 6.9% year-on-year, the first annual acceleration for the economy since 2010, beating the government’s targeted rate of around 6.5%. Contrast the situation in 2016, when growth came in at 6.7%, the lowest rate in over 25 years. The results dispelled concerns that China’s resolute control of rapidly-expanding credit could have put a dent in the overall economy. Instead, the rapid slowdown of fixed-asset investment growth, largely in real estate, was more than made up by growth in overall exports, due to currently global economic growth worldwide.

1 $63.68 and $68.691 per barrel for West Texas Intermediate and Brent Crudes, respectively. Source: Bloomberg, Jan 19, 2018, 1.55 PM ET

... CHART OF THE WEEK:

Bonds: Reaching for Yield? Look to Return

weekly chart of the week

Source: Bloomberg and Legg Mason, Jan 18, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • With low rates still prevailing, it’s tempting to seek a pick-up in income by simply moving toward higher-yielding sectors.
  • In 2017, that strategy would have been generally successful for income as well as total return.
  • As a baseline, consider the broad-market benchmark Bloomberg Barclays U.S. Aggregate Index. Last year it provided a yield of 2.71%, while returning 3.54%. 
  • But the U.S. Corporate High Yield Index, with a yield of 5.72%, returned 7.50% - substantially better.
  • However, the relationship between yield and return is hardly consistent. Indeed, the Global Aggregate- index provided a mere 1.66% yield in 2017, but offered a very substantial premium on return - 7.39%, vs 3.54%.
  • The same was true comparing U.S. Corporate High Yield to Global High Yield – slightly lower yield, but stronger total return.
  • In both cases, investing in sectors with higher concentration and risk rather than following a conventional allocation - demands specialized investment expertise to navigate relatively thinly-traded markets.
  • It’s precisely these environments in which active investment management can be especially useful – both in conventional active strategies and in opportunistic and unconstrained fixed-income approaches focused on total return. 

The chart:

  • The chart shows, between January 1 and December 27, 2017, the yields and total returns of several well-followed Bloomberg Barclays fixed income indexes – grouped by category.

DEFINITIONS:

The Bloomberg Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.

The Bloomberg Barclays Global Aggregate Bond Index is an unmanaged index of global investment-grade fixed-income securities.

The Bloomberg Barclays Euro Aggregate Index consists of bonds issued in the euro or the legacy currencies of the 16 sovereign countries participating in the European Monetary Union (EMU).

The Bloomberg Barclays Global High-Yield Index provides a broad-based measure of the global high-yield fixed income markets

The Bloomberg Barclays EM USD High-Yield Index is a subset of the Global High Yield Index, focusing on U.S. dollar-denominated EM high-yield debt.

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

The Bloomberg Barclays Emerging Markets Local Currency Government Index is designed to provide a broad measure of the performance of local currency emerging markets (EM) debt.


IMPORTANT INFORMATION:

Diversification does not guarantee a profit or protect against loss.

Outperformance does not imply positive results.

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.

Asset allocation does not assure a profit or protect against a loss.

Important Information:

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

All investments involve risk, including possible loss of principal.

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

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

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

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

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

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

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index.

Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.

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

Weekly Market Snapshot

15 January 2018

U.S. Economy: So far, so good “We have felt since the elections that the world will not wait for us”

- German Chancellor Angela Merkel, on negotiations to form a ruling coalition.

THE WEEK IN REVIEW...

U.S. in December: So far, so good Data released Friday showed core consumer prices up 0.3% for December, bringing the full year figure for 2017 up to 1.8% -- still stubbornly below the Federal Reserve (Fed)’s target of 2%. Average weekly earnings for the year grew faster than consumer inflation for the month, by a small but measurable 0.7%; average hourly earnings were ahead by 0.4% for the year. A first estimate of December’s retail sales confirmed the consensus belief that the holiday shopping season was a success; ex autos and gasoline, sales rose a seasonally-adjusted 0.4% above November’s figure, which itself came in at an upwardly-revised 0.8%. U.S. 10-year Treasury yields briefly spiked to 2.59% on this mix of data before settling back to a 2.56% - 2.57% range,1 suggesting that at least in the short term, the news was viewed positively, if not enthusiastically.

Bonds: Shaken not stirred For all the talk last week about an end of the 30-year bull market in bonds and the incipient inversion of the U.S. Treasury yield curve, the curve itself didn’t move much week-over-week – and what did change was relatively small. It was only at the longer-end of the curve, in the 10y-30y spread, that any inversion was visible, at a negative -2.66 basis points (bps). Spreads involving the shorter end of the curve, however, moved upward; the 2- to 10-year spread by about 3.8 bps, and the 2- to 30-year spread by 1.4 bps. For the full week, yields were up only slightly: by 5,0, 8.9 and 6.4 bps for the 2-, 10- and 30-year Treasuries respectively. No doubt that Wednesday’s sudden jump in yields caught the attention of market participants and observers, as has the steady rise of 2-year Treasury yields past 2.0%; only time will tell whether this is a blip or a turning point.

Euro: A good week The euro rose solidly against the U.S. dollar, moving up through $1.21, a level not seen for over 3 years. Two key reasons: first, signs of success in the long negotiations for a coalition government in Germany, suggesting a second potentially divisive election may not occur. The second reason was less positive – a pick-up in yields in Europe’s bond markets, due to skepticism about the European Central Bank’s stated plan to continue buying up a substantial portion of Europe’s bond issuance as the economies move forward. Rising yields could reflect the expectation of a major buyer stepping away from the market sooner rather than later.

Russia: Technically speaking… The widely-accepted definition of a recession is two sequential quarters of annualized negative economic growth. Russia appears to have qualified for this dubious distinction for the second time since the end of Q2 2016. But with energy prices on the upswing for both crude oil and natural gas, this state of affairs could end relatively rapidly.

1 Source: Bloomberg, Jan 12, 2018, 9:35 AM ET

... CHART OF THE WEEK:

Inflation and the Fed: Moving Goalposts


Chart of the week

Source: Bloomberg and Legg Mason, Jan 11, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Is the Federal Reserve’s inflation target overdue for an update?
  • Interested parties have been quietly discussing a substantial shift, prompted by the Fed’s limited success in hitting its inflation target – despite aggressively accommodative monetary policies.
  • In January 2012, the Fed set a 2% target rate for inflation in a first-ever “longer goals and policy strategy” statement.
  • Yet since then, the Fed’s favored inflation measure, the core Personal Consumption Expenditure (PCE) deflator, has mostly stayed well below that 2% target. Despite coming close toward the end of 2016, it’s fallen since then to a low of 1.30% in August 2017. As of November 30, the most recent figure is available, the rate stood at 1.50%.
  • So it’s not surprising that outgoing Fed chair Yellen said in her final Fed press conference that achieving the 2% goal is on her “undone list” and remains important to achieve, but “could end up being something that is more ingrained and turns out to be permanent”.
  • But that then begs the question: What does this do to today’s market expectations of the Fed’s success in the coming years?
  • One possibility: the “5-year / 5-year breakeven inflation rate” derived from the prices of Treasury Inflation-Protected Securities (Treasury “TIPS”) and the prices of corresponding Treasuries that don’t carry inflation protection.
  • Simply put, this number represents the market’s current expectations of the rate at which TIPS and Treasuries would be of equal value.
  • As it happens, the 5 year – 5-year breakeven rate doesn’t suggest inflation is going to surpass 2% for any extended period over the coming 5 years – disappointing news for all who’d hoped rising employment would kick-start a benign wage-price spiral by now.
  • Of course, economists both inside and outside the central bank have their own alternatives to guide the Fed, including a focus on achieving a “natural” interest rate or setting a fixed rule to govern monetary decisions.
  • Time will tell whether the incoming Fed Chair and Vice-Chair will endorse a change, or if the current gradual, clearly-communicated policies will continue, supporting today’s historic length of record-low volatility.
  • The bottom line: Markets favor predictable processes and objectives.  To the extent that changing objectives are in the offing, the hope is for continued clarity in communicating the whys and wherefores, as well as continued stable, synchronized growth.

The chart:

  • The chart shows, between January 4, 2016 and January 10, 2018, the year-over-year growth of the core Personal Consumption Expenditure deflator, alongside the 5 year – 5-year breakeven inflation rate, as calculated by the Federal Reserve Bank of St. Louis.


DEFINITIONS:

The 5-year, 5-year forward breakeven inflation rate is a measure of expected inflation derived from "nominal" Treasury securities and their "real" counterparts—inflation-protected TIPS securities.

The Personal Consumption Expenditures (PCE) Deflator is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account. Core PCE excludes food & energy prices.

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.

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 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.


Important Information:

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

All investments involve risk, including possible loss of principal.

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

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

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

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

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

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index.

Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.

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Click on a date to view that week's edition of weekly snapshot.

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