Market index returns

Week to date since Aug 07, 2024 as of Aug 14, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Global equities continued to rebound from their early August low but still find themselves short of July’s all-time high. Positive earnings news, encouraging economic data, and falling inflation all helped support the market’s recent strength. Fears that the U.S. could be entering a recession and that the U.S. Federal Reserve (Fed) would have to make an emergency rate cut have quickly abated. Importantly, equity market volatility has lessened, with the VIX Index dropping from 27.9 to 16.2 during our review period and has continued to fall subsequent to our reporting period. Easing interest rates have spurred a flood of mortgage applications for both refinancing and home buying, and when coupled with strong retail sales (which we detail below), could help put the U.S. back on track for a soft-landing scenario. While other regions are still trying to find their footing, and overall global growth is still expected to slow this year, the stage looks set to see growth maintained in 2025.

Against this backdrop, all Real Assets classes saw positive returns this week but underperformed the broader equity market. Global Real Estate securities led returns amongst the Real Assets with strong performance from the U.S. data centers. Natural Resource equities were close behind as energy producers rebounded from the week prior. Gains were slighter from Global Infrastructure securities and Commodities, while Treasury Inflation-Protected securities (TIPS) were the relative laggards.^[1]

Why it matters: Geopolitical events could unravel markets in a hurry. The world is holding its collective breath in anticipation of some sort of retaliatory Iranian strike on Israel for recent (alleged) assassinations, and ceasefire talks for the Gaza Strip appear stalled. Ukraine has gained ground and captured villages inside Russian territory this week, and with new European and American weapons flowing in, they are likely to get even bolder. We have no idea how Russia and President Putin will respond to these acts, but it certainly won’t be with the white flag of surrender. There is still a presidential election in the U.S. to be had, and while both candidates talk about fighting inflation, we feel that the potential policies discussed by either candidate could reignite price growth in a wide variety of areas. Meanwhile, the U.S. Congress continues to bury its head in the sand and ignore the implications of continued fiscal deficits, but we will remind readers the current debt ceiling suspension ends on January 1st of 2025, before the new Congress is seated or the new president is even inaugurated.

Macro Dive: First, we’ll review the latest inflation data in the U.S. before inspecting an update on retail sales that occurred last month. Then, we’ll analyze the latest economic data out of China and what’s holding them back.

• What inflation?: The latest Consumer Price Index (CPI) and Producer Price Index (PPI) data in the U.S. solidified market expectations that the Fed will cut rates for the first time this cycle at its September meeting, but likely only by 25 bps. First, overall PPI rose by only 0.1% month-on-month and 2.2% year-on-year in July, both 10 bps below expectations and decelerating from June’s print. Core PPI (which excludes volatile food and energy) was flat for the month and rose only 2.4% year-on-year, both 20 bps below expectations and again decelerating from June. The next day, CPI was released, which was more closely in line with expectations. While month-on-month headline CPI and core CPI of 0.2% were higher than June’s -0.1% and 0.1%, the year-over-year print of headline at 2.9% and core at 3.2% showed continued deceleration on a longer-term basis. While voting Fed members will get a look at the Personal Consumption Expenditures (PCE) Price Index on the final Friday of this month (before their September meeting), absent any major upside surprises, all signs point to a 25 bps rate cut next month (as measured by Fed Funds futures), with some investors (although far fewer than a week ago) expecting a 50 bps cut. Investors are also fully pricing in 25 bps cuts at the November and December meetings, should the Fed cut by 25 bps in September. ^[2]
• US consumers win gold medal in spending: New data showed U.S. retail sales were strong in July, helping to allay fears of weakening consumers and a potential U.S. recession. The advance print showed overall sales rose 1.0% in July from the month prior, defying expectations of 0.4% growth. If it was any solace to the market bears, June’s month-on-month growth was revised down to -0.2% from flat, indicating spending was a bit less last month than previously reported, although most of this was attributable to lower automobile sales as June’s retail sales ex-autos were revised higher by 10 bps to 0.5% growth. Returning to the topic of July’s print, sales exautos, and sales ex-autos & gas were both up 0.4% from June against expectations of 0.1% and 0.2%, respectively. In overall categories for July, automobile sales were the fastest growing, rebounding to 4.0% growth from the month prior (and probably helped by one of the editorial team members buying a new Subaru). Electronics and appliances store sales followed, growing by 1.6%. In declining sales, miscellaneous store retailers’ sales fell by 2.5% and sporting goods/hobby/musical instruments/bookstores fell by 0.7%. Overall, the report was viewed favorably, especially in tandem with the release of initial and continuing jobless claims coming in below expectations and helping extend the broader equity market rally beyond our review period.^[3]
• China continues to struggle: Recent economic data out of China shows the country is still not living up to its economic potential. Furthermore, an interesting trend is arising where imports are growing faster than exports. To start, the Caixin China Purchasing Managers’ Index (PMI) data for July showed continued expansion at 51.2, although below June’s 52.8, but peeling back the layers revealed manufacturing PMI slipped marginally into contraction at 49.8, while the composite number was held up by Services PMI at 52.1. Across July, the growth of imports surpassed exports in both U.S. dollar terms and Chinese yuan, and while they still had a massive trade balance surplus at $84.7B, it missed estimates by almost $14B U.S. dollars and shrank considerably from June’s surplus of over $99B. Perhaps most worrisome, China’s real estate markets remain in the doldrums. New and used home prices continue to fall, and sales volume year-to-date through July is down almost 26% from the same year ago period. Additionally,  \8 investment in new properties, which includes both residential and commercial, is down over 10% year-to-date through July from the same year ago period.^[4]

Real Assets, Real Insights: We’ll  first look at the larger apartment occurring between two real estate behemoths. Then we’ll conclude this week with a flashback and outlook on zinc, one of the more important industrial metals.

• A chip off the stone (Real Estate): Equity Residential (NYSE: EQR), a Chicago-based apartment Real Estate Investment Trust (REIT) with an equity capitalization of $27B, recently announced it was buying a $1B portfolio from Blackstone (NYSE: BX). The deal encompasses 11 different apartment properties consisting of over 3,500 units located in the Atlanta, Dallas-Ft. Worth, and Denver areas. The properties have an average age of 8 years and are of ‘A’ quality, with the deal closing at an estimated 5% cap rate. Multiple BX entities were involved in the sale, including Blackstone Real Estate Income Trust (BREIT), Blackstone Real Estate Partners, and Blackstone Property Partners, and while no reason was given by BX for the disposition of assets, they noted it “represents an excellent outcome for our investors and demonstrates the strong institutional demand for high quality assets.” We would note however BREIT, an open-ended, public non-traded REIT, has suffered from investor redemption requests for the past two years, with investors asking for $806M in June alone. For EQR’s part, these acquisitions represent continued expansion into sunbelt markets, and they intend to fund the purchase with the sales of older coastal apartments and the issuance of new debt.^[5]
• Z is for Zinc (Commodities): Zinc prices moved back into positive territory for the year this week with the 3-month rolling forward contract at the London Metal Exchange (LME) closing out our review period at $2,689 per metric ton. Zinc closed out 2023 at a price of $2,658 before falling as low as $2,300 in February only to race higher to $3,140 in May but had fallen back into negative territory in July on weak economic data out of China, recession fears, and overall demand concerns. Stockpiles at the LME and other exchanges have flatlined after rising earlier in the year, and the market for zinc concentrate has tightened for several months. As zinc is used in the galvanization process for iron and steel, increased demand for automobiles, electrical equipment, and general construction could drive prices higher. However, don’t get too excited yet, as we expect the zinc concentrate market to loosen considerably in the back half of this year, which could see the nascent rally taper.^[6]