Week in Review: Yields on the Rise
Review of the week ended 28 October 2016
- Global yields extend backup
- US Q3 GDP grew at fastest pace in eight quarters
- EU–Canada free trade negotiations go into overtime
- Spain to form first government in 10 months
- European economy shows signs of life
Global equities were modestly lower this week, and interest rates generally firmed. Expectations for a December rate hike from the US Federal Reserve continue to solidify, while investors begin to anticipate the tapering of extraordinarily accommodative monetary conditions from other major central banks during 2017. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), edged up to 15.25 from 14 a week ago. Oil prices declined this week. West Texas Intermediate crude fell to $49.25 from $51 last Friday, while global Brent fell to $50 from $52. The yield on the 10-year US Treasury note rose to 1.85% from 1.75% a week ago.
GLOBAL MACRO NEWS
Yields extend recent rise
Firmer economic data, particularly in Europe and the United Kingdom, helped extend the recent move higher in most global bond yields. The Citigroup Economic Surprise Index, which measures how economic data fares relative to expectations, has shown a marked uptick of late, as neither the eurozone nor the UK have displayed much malaise in the wake of the surprise Brexit outcome in June. German 10-year bunds are solidly in positive territory, ending the week around 0.17%. UK 10-year gilts are at post-Brexit highs of 1.26% after strong Q3 GDP data, while US 10-year yields are trading near 1.85%, the highest level in four months.
US GDP pace improves
The United States enjoyed its best quarter of economic growth in two years in the third quarter, according to data released by the Bureau of Economic Analysis. The economy expanded at a 2.9% annual rate, boosted by a rise in inventories and on a narrower trade deficit. Consumption, which had kept the economy afloat in prior quarters, was muted in Q3.
Off the Wallonia
The signing of the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada was derailed Thursday by a dispute in the parliament of the Belgian region of Wallonia over agricultural competition. All 28 member states will now be forced to vote on the Wallonian amendments to the agreement and are expected to do so by midnight on Friday, 28 October. Canadian Prime Minister Justin Trudeau was forced to cancel a planned signing ceremony in Brussels on Thursday. The unexpected roadblock calls into question the workability of EU political structures and serves as ammunition for anti-EU populist political movements.
Spain expected to form government on Saturday
After two inconclusive general elections, Spain is poised to form a government on Saturday, as the Socialist party has cleared the way for Mariano Rajoy’s Popular Party to form a government. The country has been without a government for 10 months, but the news has not been all bad. During that time unemployment has fallen and tourism has surged, and the economy has grown at a more than 3% annual rate over the past year.
European economy bouncing back
As noted earlier, the European economy has held up surprisingly well in the wake of the UK Brexit vote. This week saw a jump in Germany’s Ifo index of business confidence to a two-and-a-half-year high and in the purchasing managers' indices. The eurozone manufacturing PMI rose to its own 30-month high at 53.3. Despite the upbeat data, inflation remains below the European Central Bank’s 2% target. The ECB is expected to extend its quantitative easing program for six months at its December meeting. Earlier this week, ECB President Mario Draghi defended the central bank’s policies and declared victory over deflation. ECB action has removed the threat of a vicious spiral of falling prices and weaker demand, he told a German audience. Data released Friday showed that the French economy expanded 0.2% versus the prior quarter, while Spain grew 0.7%.
GLOBAL CORPORATE NEWS
VW receives settlement approval
Volkswagen this week received court approval for a $14.7 billion settlement with US regulators and vehicle owners over a diesel engine emissions scandal. The settlement was reached with the US Department of Justice, the Federal Trade Commission, the state of California and vehicle owners who filed a class action lawsuit.
GE and Baker Hughes in oil talks
General Electric and Baker Hughes are in talks to potentially combine their oil services operations into a separately listed company. The deal would be worth in excess of $20 billion, according to press reports.
Qualcomm makes big car bet
Chip maker Qualcomm has agreed to buy NXP Semiconductors, the world’s largest developer of chips for use in automobiles, for $38 billion, the largest-ever deal in the semiconductor space. The move is seen as a big bet on the ever-increasing use of technology in cars and would lower Qualcomm’s dependence on the mobile phone market.
THE WEEK AHEAD
- Daylight-saving time ends in the UK and Europe on Sunday, 30 October
- Eurozone GDP and CPI numbers are released on Monday, 31 October
- The core PCE price index—the US Fed’s favorite inflation measure—is released on Monday, 31 October
- The Bank of Japan meets to set interest rates on Tuesday, 1 November
- Manufacturing PMIs are released globally on Tuesday, 1 November and Wednesday, 2 November
- The Fed’s rate setting committee meets on Wednesday, 2 November
- The Bank of England meets to set interest rates on Thursday, 3 November
- The US employment report is released on Friday, 4 November
Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.
The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.
Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.
Past performance is no guarantee of future results.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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