Markets were lower across the board last week with the Dow Jones Industrial Average falling 0.84%, the S&P 500 giving up 0.59%, the NASDAQ slid 1.13% and the Russell 2000 dipped 0.97%.
Congress managed to get together to kick the can down the road on the debt ceiling buying three more months by lifting the limit. Oddly, President Trump appeared to side with the democrats on this issue to the frustration of quite a few in the GOP. Trump campaigned on politics not as usual and while his success in this regard is debatable, the debt ceiling would seem to fit the bill of not at usual. This news was not enough to lift equity prices perhaps for the simple reason that every politician with a microphone told us there was no way there would be a shut down and they were right.
With the back to back hurricanes and we might as well throw in the wildfires out west and the 8.2 magnitude earthquake in Mexico, the $90 billion catastrophe-bond market has drawn a lot of attention. The simplified explanation is that in the face of a catastrophe, these bonds which are issued by insurance companies have the principal forgiven, meaning investors are wiped out, in the face of a catastrophe like a hurricane. Here’s a story of a hedge fund that specializes in cat bonds. We are not aware of any ETFs that own catastrophe bonds but this provides a great example of the importance for advisors and individual investors to look through to fund holdings to know what they own and while you may not be directly vulnerable to cat-bonds being wiped out all portfolios are vulnerable to something and that needs to be understood.
The yield on the ten year US Treasury Note took another big step lower last week down to 2.06%. Barron’s blamed the drop on just about everything including North Korea, the lack of inflation, the hurricanes (we presume the weather events not the University of Miami Football team) and so on. There is an an inertia for lower yields with escalating concerns over potential external events (geopolitical and weather) and expectations for tepid economic results. The FOMC is off the table for an outright rate hike even if it does begin to shrink its balance sheet.
The euro continued to show strength against the US dollar, closing above $1.20 for the first time in almost three years. Trading-wise this has of course been the trend, also helping the euro is the very real possibility that the ECB will start to wind down its quantitative easing sooner or perhaps more deliberately than the Federal Reserve. We talked a few months ago about the dollar as measured by DXY running into meaningful resistance at 105 with no equally meaningful support anywhere close by. DXY closed Friday with a 91-handle and still no corresponding support nearby that equates to the 105 resistance. The dollar could reverse course at anytime for any reason at all (or no reason) but for now the environment for foreign equity exposure looks positive.