Equities Maintain Their Resilience – U.S. Equity Markets

A persistent trade dispute between the United States and China has been lingering over the financial markets for some time now. Helping to buoy domestic markets are strong corporate earnings and improving economic data. Earnings from U.S. companies this quarter are being considered the healthiest since the third quarter of 2009 during the financial crisis.

Some U.S. companies are seeing an increase in sales as well as an increase in gross margins, considered optimistic by equity analysts. The continued strength of the U.S. dollar, however, is starting to weigh on earnings for certain companies transacting business overseas.

The administration has proposed altering quarterly reporting for publicly traded U.S. companies to a semi-annual basis. Similar proposals have been made by companies and regulators in the past in order to stem volatility and focus on earnings. Recent news has focused on some companies going private and shedding the regulatory hurdles and burden caused by quarterly reporting.

Sources: Bloomberg, Federal Reserve Bank of St. Louis

Emerging Market Currencies Experience Volatility – International Currency Review

Currency valuations across the emerging markets are being affected by recent financial turmoil in Turkey and Argentina. The Turkish currency, the lira, has fallen over 40% year to date versus the U.S. dollar. The Turkish lira has been the hardest hit so far this year of all of the emerging market currencies. Emerging market currencies, as tracked and measured by the MSCI International Emerging Market Index, has had a continuous decline since the beginning of 2018. 

Concerns about the exposure that European banks have to Turkish bonds became a forefront topic for global bankers. Government spending by Turkey has been equal to that of the government in Greece that led to the country’s debt crisis in 2012. Circumstances that occurred in Greece are appearing in Turkey as mounting government debt has hindered the government’s finances and integrity.

The Argentine peso has lost over half its value versus the U.S. dollar so far this year. A sell-off in the Argentine currency was exacerbated when the president of Argentina asked the International Monetary Fund to speed up its release of $50 billion in bailout funds for the country.

Ironically, the economic growth and strength of the U.S. dollar has been a catalyst for emerging market currency turmoil. The problem lies with dollar denominated debt owed by emerging market countries such as Turkey, Greece, Argentina, and Venezuela. As the U.S. dollar appreciates versus the currencies of these other countries, the cost to repay the debt increases. 

Large international banks and institutional holders of emerging market debt buy insurance to protect themselves from default, should countries become unable to pay their debt. The insurance is known as credit default swaps or CDSs. The cost of insuring debt against a default has risen for various countries over the past few months, most notably Lebanon, Turkey, Pakistan, and Argentina. (Sources: Bloomberg, Reuters, FRED, IMF)

Yields Continue To Flatten – Fixed Income Update

A flattening Treasury yield curve remained a focal topic among fixed income analysts in August. The shrinking spread, or difference, between the yield on the 2-year Treasury note and the 10-year Treasury bond reached levels not seen since 2007. The interpretation is that longer term economic growth is expected to be muted, which is reflected in the yield of the 10 year Treasury. The Federal Reserve is still on course for additional rate hikes, but at a very gradual pace.

Ten years have passed since the financial crisis that began in September 2008 when the Federal Reserve flooded the financial markets with massive amounts of liquidity in order to stem the crisis at hand. An ultra low interest rate environment followed for nearly a decade before the Fed reversed course and started raising rates once again.

The Federal Reserve mentioned during one of its meetings in August that it had determined when a prolonged period of low volatility exists, an increase in lending and risk-taking ensures.

Sources: U.S. Treasury, Bloomberg

Wireless Rates Are Due To Climb – Consumer Expenditures

Cell phone bills are rising across the country as providers eliminate promotions and consolidate operations. The announcement of recent mega mergers in the industry has reduced the number of providers and lessened competition, leading to increased rates for customers.

As tracked by the Labor Department’s Consumer Price Index (CPI), the cost of cell phone service is a measurable component of the index. Over the years, cell phone costs have become a vital and expensive service for consumers nationwide, almost as important as groceries or rent. It is estimated that roughly 95% of Americans own a cellular phone and pay a monthly service fee to one of several providers.

Following years of technological advancement and intense competition for market share, cellular providers kept rates low. Adjusted for inflation, cell rates have consistently fallen in price since 1997, meaning that as the price for other services rose, cellular rates fell.

The recent mergers and expansion of new cellular infrastructure has begun to raise rates. Rather than absorbing merger costs and infrastructure build out, cellular service providers are instead passing along the costs to consumers. The higher fees are considered inflationary and thus add to the overall inflationary pressures that are gradually rising.

Sources: BLS, Labor Department, https://www.bls.gov/news.release/cpi.nr0.htm