Market index returns

Week to date since August 30, 2023 as of September 6, 2023

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.

• Feeling down in the land down under: The RBA opted to hold their policy benchmark rate steady at 4.1% for the third meeting in a row, a decision likely influenced not only by inflation falling to an annualized rate of 4.9% in July (from 5.4% in June) but also by slowing economic growth as Q2 GDP grew at 0.4% quarter-on-quarter but shrank by 0.3% on a per capita basis. This was the second quarter in a row of GDP falling on a per capita basis (and it grew by just 0.1% in 4Q 2022) as the local population has been growing more quickly than the Australian economy. In June, the Organization for Economic Co-operation and Development (OECD) forecast Australia’s economy to grow by 1.8% in 2023, falling to 1.4% in 2024, indicating more weakness ahead while a strike at a major LNG project (starting as we write this) is making matters worse. Moreover, China’s ongoing economic woes are weighing disproportionately as they are a major trading partner with Australia.
• German industrial orders fail to prevail: It was reported this week that German factory orders fell by 11.7% month-on-month (and 10.5% year-on-year) in July, a much greater decline than consensus estimates anticipated. Additionally, industrial production declined by 0.8% month-on-month (and 2.1% year-on-year) while manufacturing, services, and construction PMIs all remained in contractionary territory (i.e. below 50) for July. It’s no secret that Germany is already in a recession, but this new data indicates that economic frailty could be worse than anticipated and could impact other countries in the region. Accordingly, our parent company, DWS Group, recently downgraded its view on the EUR/USD given the relative economic weakness in the Eurozone juxtaposed with the U.S.
• Saudi squeeze sees crude oil climb: Saudi Arabia (and Russia) announced this week that they will continue their “voluntary” cuts in oil supply through the end of 2023. These cuts, first announced in early June, have been about 1M barrels per day (bpd) for Saudi Arabia and 300k bpd for Russia. This news sent crude oil prices higher, with Brent crude topping $90 per barrel for the first time since November 2022. Meanwhile, in the U.S., the Energy Information Administration (EIA) reported crude oil inventories (including the strategic petroleum reserve) dropped by over 6M bbls this week to 767M bbls, its lowest level since 1985. In unison, these events have led to multiple analysts forecasting $100 per bbl crude prices in the not-too-distant future. Distillate products, such as diesel and jet fuel, have been in short supply as well.
• Natural gas assets to cross the energy bridge: This week, Canadian pipeline operator Enbridge announced it would acquire three local gas distribution utilities from Dominion Energy. In a $14B deal ($9.4B in cash and $4.6B in assumed debt) expected to close by the end of 2024, Enbridge would become the new owner of The East Ohio Gas Company, Public Service Company of North Carolina, and Questar Gas Company, which together serve about 3 million homes and businesses in Ohio, North Carolina, Utah, and Wyoming. This deal will help Enbridge expand their natural gas distribution business and become “North America's largest natural gas utility platform” while serving ~7 million total customers. For Dominion’s part, the transaction is part of their ongoing strategic review to simplify their business and reduce leverage.

• Upcoming central bank action: This week also saw the BOC opt to hold rates steady at 5.0% (following somewhat surprising hikes at their prior two meetings), but even more investors will be carefully watching the ECB’s actions and statement next week. The ECB is largely expected to temporarily pause rate hiking next week, though at least one Governing Council member, Klaas Knot, has cautioned against underestimating the odds of a hike at the September meeting. Given that the ECB is maintaining its 2% inflation target, which is substantially lower than the annualized 5.3% reported for August — a bias for additional hikes persists, whether next week or in future meetings. Later in the month, rate decisions from the Fed and the BOE are also due. The Fed is likely to stand pat in September (but with increasing odds of a hike in November) while a 25 bp hike from the BOE seems the most likely outcome, with potentially more in the future.
• Coming soon, the shutdown showdown: Having narrowly avoided a default early this summer, one might think or hope the U.S. Congress would have learned their lesson and worked to pass the needed appropriations bills early enough to avoid another potential government shutdown this time around. Alas, politicians are prone to grandstanding, and we now face an end-of-the-month deadline when the government’s current fiscal year ends. The most likely scenario is a continuing resolution (CR) which provides temporary funding while a full year budget is subject to further negotiations. But even a CR isn’t a sure thing with some Republican members of the House demanding spending cuts that are likely to be a non-starter for Democrats. Republican House Speaker McCarthy, for his part, must walk a fine line to find the needed balance to strike an acceptable agreement, especially since any member of his party can call to oust him from leadership if they feel he is giving away too much to the Democrats. Stay tuned as this one should be a doozy!
• What the IRA giveth, it can also taketh away: The Inflation Reduction Act (IRA), a monumental bill passed in August 2022, included ~$370B in spending on climate and energy policies (hopefully) to reduce U.S. carbon emissions 40% by 2030. However, some are finding it might not be enough or could even be exacerbating problems. For example, rising costs have negatively impacted returns for the entire global offshore wind industry since power contracts are locked in several years before the completion of those projects. Danish renewable energy provider, Orsted A/S, recently announced impairments on three U.S. offshore wind projects driven by supply chain disruptions, uncertainty surrounding the tax credits, and higher interest rates. While Orsted has threatened to walk away from these projects unless more government aid is given, other developers have already agreed to pay tens of millions of dollars in penalties to exit contacts that are no longer economically feasible.
• How will support for a new farm bill grow?: The current Farm Act was signed in 2018 with many provisions expiring in 2023 as agricultural and food policies are made through a legislative process that occurs about every five years. A new bill could have major ramifications not only for farmers, food producers, and consumers, but also for the related commodities (e.g. corn, wheat, soybeans) and natural resource companies (e.g. ethanol and fertilizer producers) we follow in Real Assets. Make no mistake about it, this will be a colossal piece of legislation, separate from the above-mentioned appropriations bills, that will be hotly debated in Congress and could top the $1T mark for the first time. It’s too early to tell what will be included and what’s left out, but we will be watching this one closely.