3 Stories in the global economy that should not go un-noticed
Markets rallied strongly for another week, posting their second best weekly performance of the year and sending the S&P 500 and Dow indexes to new highs. Earnings reports and calming words from Fed Chairman Ben Bernanke contributed to the market surge.
For the week, the S&P 500 gained 2.96%, the Dow grew 2.17%, and the Nasdaq gained 3.47%.
Here are the 3 stories this week that rose above the noise:
China Facing Growth Dilemma
The Chinese economy grew 7.5 percent year-over-year in the second quarter, in line with expectations, but down from 7.7 percent in the first three months of the year to mark the second straight quarter of slowing growth. A large degree of uncertainty remains regarding the growth outlook for the second half of the year and beyond.
At issue is whether China is willing to sacrifice short-term growth through reform in exchange for more sustainable long-term growth. Subdued returns on assets, ever-rising leverage and high interest rates have reduced the effectiveness of monetary policy which will impact China’s ability to meet growth targets.
The U.S. Dollar Is Enjoying a Rare Period of Strength. How Far Can the Rally Go?
The U.S. dollar has risen this year against a broad range of global currencies. The U.S. dollar’s strength has been a headwind for a range of foreign investments, including emerging market debt and equities. An article from The Economist examines the reasons behind the U.S. dollar’s strength as well as its outlook.
The U.S. dollar index has risen 4.2 percent year-to-date and the article speculates a further 5 percent-7 percent appreciation may occur but that is likely to be the limit of its strength. The reasons: America’s economy is doing well enough to give its currency a boost, but it’s not so strong as to spur the sort of bull run the dollar enjoyed in the late-1990s.
Bernanke Boom Signaled by Yield Surge as Market Recalculates
A recent Bloomberg article provides an overview of the widely divergent views that have developed among bond market analysts given the recent sharp rise in yields. As the title of the article implies, some analysts view the rise in U.S. Treasury yields as a clear sign that economic growth will accelerate sharply in the second half of the year and ultimately yields will go much higher. The opposing view is that the current economic data does not justify much more of an increase in yields, with growth and inflation both running at below-average levels.
Our current intermediate-term view is that the odds favor yields stabilizing and not going notably higher in the second half of the year for many of the reasons noted in the article. One additional reason to believe yields will stabilize that is not noted in the article is that real yields on U.S. Treasuries using core inflation have become attractive relative to most other large developed market bonds, including the most attractive relative real yield versus the German bund in well over a decade.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
