Charles Schwab Investment Management

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

June 11, 2018


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  • Equities: Risk-on sentiment reignites

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Dow climbs back above 25,000

    Recent U.S. economic data reignited the risk-on sentiment for equities despite geopolitical concerns and ongoing discussions about U.S. tariff effects. Signs of a healthy domestic economy should encourage the Federal Reserve to continue normalizing rates this week. As a result, 10-year Treasury yields headed back toward 3.0%, while the U.S. dollar slowed its rapid appreciation.

    Potential rotation on the horizon

    Growth and momentum have paced the market’s gains so far this year, but a sentiment shift may be taking shape. As is typical in an economic cycle’s final phase, growth has been outperforming value by a wide margin, primarily driven by Technology. Capital expenditures accelerated in the first quarter, with Technology, Consumer Discretionary, Energy, and Industrials accounting for more than 80% of the increase. As the current environment evolves, rising rates and softer global growth could support a future shift toward Energy, Financials, and Materials.

    Europe’s soft patch and emerging market risks

    Recent manufacturing and sentiment data showed slower growth in the euro zone. This suggests that the European Central Bank may extend its current quantitative easing program, especially given developments in Italy. Meanwhile, emerging markets continue to face headwinds, driven by the backdrop of slower global growth and currency volatility in Brazil, Mexico, and Turkey.

  • Fixed Income: Italian politics take center stage

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Populist party politics in Italy

    Italy’s populist parties have recently been voted into power and have formed a coalition government. The anti-euro Five Star Party and anti-immigration League Party have joined forces and will tackle the daunting task of addressing Italy’s severe fiscal and social challenges. The problem will be accomplishing these tasks while adhering to European Union (EU) deficit constraints.

    Should I stay, or should I go

    One recent proposal espoused the benefits of leaving the EU, a move that would give Italy total fiscal and monetary policy control. However, abandoning the euro would lead to a massive devaluation of any new Italian currency, and cause a potential restructuring of Italy’s debt. Recent polls suggest a majority of Italians want to stay in the EU, making a departure unlikely. In fact, the greater risk may be in posturing by the new government as it attempts to extract concessions from the EU.

    Uncertainty pushed down Treasury yields

    Stocks in Italy dropped 13% in recent weeks amid the political upheaval, while yields on 10-year sovereign bonds nearly doubled. As they often do, U.S. Treasuries served as safe-havens, pushing yields lower. Though Italian markets are normalizing, 10-year U.S. Treasury yields remain below 3%. The Fed will likely raise rates this week despite the turmoil, although it’s possible that future rate hikes could be impacted by any European political fallout.