Is this it? Are commodities finally about to turn a corner after a horrible first half and join the rally enjoyed by the stock and bond markets? Judging by the performance of raw materials in July the answer is a definite maybe. The Bloomberg Commodities Index was up 2.17 percent for the month in late New York trading, the benchmark’s best performance since September and snapping a slump that lasted four straight months.
With the exception of the slide in wheat and natural gas, almost every major commodity posted admirable returns. The stars of the market were industrial metals, oil and gasoline, and some agriculture items such as coffee and soybeans. But what everyone can’t stop talking about is the rally in copper, which traders like to say has a doctorate in economics because of its function as an input in everything from pipes to wiring that makes it a good barometer of global production. While that can be debated at a time when central banks have such tight control over markets, there’s no denying that copper’s rally in July coincided with stronger economic data out of China.
The rally in commodities also corresponds with the International Monetary Fund’s latest estimates for world economic growth. The organization said early last week that it still sees the global economy expanding 3.5 percent this year, despite a reduction in the outlook for the U.S.
You’re not imagining things. The bull market in stocks really is only getting stronger. The MSCI All-Country World Index posted its ninth straight monthly gain in July, it’s longest rally since 2003-04. The benchmark was up 2.76 percent for the month in late trading, the most since it gained 4.21 percent last July. At the risk of using a term that often gets overused when describing financial conditions, it’s hard to depict the backdrop for stocks as anything other than a Goldilocks scenario. Yes, there is political risk, especially in regards to the U.S., and valuations are relatively high but the economic tailwinds are strong. The global economy is continuing to gather pace without sparking faster inflation, which is allowing central banks to either begin slowly paring back their extraordinary stimulus measures, such as in the case of the Federal Reserve, or begin to talk about doing so. At the same time, corporate earnings are rising and volatility is low. “There’s so much liquidity in the markets” that when it comes to politics “very little is actually going to influence economics,” Megan Greene, the chief economist at Manulife Asset Management, said on Bloomberg Television.
Who says Fed interest-rate increases are bad for bonds? The fixed-income market came roaring back in July after taking a quick break in June. The benchmark Bloomberg Barclays Global Aggregate Index rose 1.50 percent for the month through Friday, bringing its year-to-date gain to 5.97 percent. That’s good enough to already make 2017 the best year for the bond market since 2009 despite the Fed raising rates three times in the span of seven months. Investors are clearly encouraged by evidence that inflation may actually be slowing in many places. The stars of the month were global government securities, high-yield debt and emerging markets. Of the 19 major parts of the market tracked by the Bloomberg Barclays indexes, the only one to show loss was the Pan-European Aggregate Index, which dipped 0.16 percent.
Foreign-exchange traders can’t catch a break. The Parker Global Strategies index that tracks the performance of foreign-exchange-focused funds was headed for a 0.59 percent loss for July, the third straight monthly decline. That’s the longest slump since before the U.S. elections in November. Many traders were caught by the weakness in the dollar, which is down for the fifth straight month as measured by the Bloomberg Dollar Spot Index. Also surprising was the performance of the Swiss franc, which was down 4.14 percent against a basket of developed-market peers as measured by Bloomberg Correlation-Weighted Indexes. That’s its worst loss since February 2015. Another notable currency is Brazil’s real, which appreciated almost 6 percent against the dollar in July, despite a government mired in corruption investigations and President Michel Temer fighting charges of graft.
More evidence emerged Monday that U.S. businesses may be losing confidence in the Trump administration’s ability to juice the economy. The Fed’s quarterly survey of senior loan officers at banks found that demand for commercial and industrial loans has fallen to their lowest levels since the first half of 2016. That marks a reversal from the January survey, which showed a rise in demand among both large and middle-market firms as well as small businesses. What’s just as surprising is that banks hadn’t tightened their lending standards. The survey also confirms comments made by executives of some of the biggest banks over the last couple weeks as they reported second-quarter results. JPMorgan Chase toned down its outlook for loan growth and interest income in the second half, while Wells Fargo reported a drop in lending that surprised some analysts. “There would be much stronger growth if there were more intelligent decisions and less gridlock,” JPMorgan Chief Executive Officer Jamie Dimon said on a conference call with analysts in reference to the U.S. political situation.
Can the widely-followed monthly manufacturing index from the Institute for Supply Management be believed? That’s a question posed by the economists at Bloomberg Intelligence ahead of Tuesday’s report for July. The median estimate of economists surveyed by Bloomberg is for a dip in the index to 56.4 from the 57.8 reading for June. A reading of 50 is the dividing line between contraction and expansion. The BI economists note that the index “has exhibited substantial swings” the past year, rising from a mildly contractionary reading last summer to a more than two-year high of 57.7 in February. They say that while ordinarily a useful barometer of underlying industrial activity, the index appears to have taken on “a heightened element of sentiment since the U.S. election, thereby overstating actual output gains.” For example, a moderation early in the second quarter to readings of 54.8 for April and 54.9 for May hinted at waning hopes for the Trump administration’s economic agenda, but then gave way to a rebound in June.
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