Charles Schwab Investment Management

Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.

July 10, 2017

Download PDF
  • Equities: Resiliency trumped headwinds

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    The overseas equity market rally continued

    In spite of escalating geopolitical tensions, resilient international equity markets gained ground. A global “reflation” trade provided the catalyst as the orderly economic recovery in the euro zone continued. Hints from the European Central Bank and the Bank of England that policy accommodations are nearing an end also supported stocks. Among emerging markets, equities benefited from relatively attractive valuations and U.S. dollar depreciation.

    Hawkish Fed to unwind its balance sheet

    U.S. stocks are currently pricing in one more interest rate hike by the Fed this year, even though inflation remains well under control. Market volatility may play a leading role in when the Fed will begin to unwind its roughly $4.5 trillion balance sheet.

    U.S. stocks navigated blustery headwinds

    Tensions with Russia and North Korea and concerns regarding an upcoming Group of 20 summit of world leaders provided headwinds for U.S. stocks. Lackluster wage growth and productivity gains also represented challenges. With volatility historically low and valuations relatively rich, the second-quarter earnings season could turn into a high hurdle for equities. From a sector standpoint, a rotation from growth to value was a central theme in June, helping Energy outperform as oil prices modestly recovered. Financials benefited from the outlook for a steeper yield curve, while profit taking drove the Technology sector lower.

  • Fixed Income: The Draghi effect

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Bond yields rise, but don’t blame Janet!

    Over the past week or two, we’ve seen a dramatic rise in Treasury yields. Yields on 10-year Treasuries are up from about 2.13% to almost 2.40% late last week. Though the Fed has raised rates three times over the past three quarters, this very recent rise in yields has had very little to do with Fed rate policy.

    Don’t blame the data, either!

    Bond yields typically increase when there are meaningful signs that the economy is growing and inflation is on the rise. That’s not quite happening right now. Over the past few weeks the economic data has been mixed at best, with consumer prices, retail sales, and durable goods all coming in below expectations. Hardly a scenario that should lead to higher bond yields. Even the better-than-expected June jobs report didn’t move the needle much.

    This time, it’s all about Mario Draghi.

    As the head of the European Central Bank (ECB), Mario Draghi is like the Janet Yellen of the euro zone. Recently, Draghi expressed optimism regarding economic growth and inflation prospects in Europe. This caused European bond yields to rise sharply as investors braced themselves for an eventual unwind of the ECB’s version of quantitative easing. Subsequently, investors assumed the same effect would occur in the U.S., driving yields sharply higher. So now here we are with 10-year Treasury yields hovering around 2.40%. But don’t blame Janet!