During the quarter, the global markets experienced significant volatility, but ended relatively flat. Daily price fluctuations were largely driven by global macroeconomic headlines including a potential Greek default, Chinese market instability, and diverging global monetary policy. While the impacts of the strength of the U.S. dollar and depressed oil prices still remain relevant, their effects on the global markets this quarter were more muted than in the first quarter.
The volatility in the markets was largely due to the uncertainty in Greece and its ability to repay its debt. On June 30, 2015, Greece missed a payment due to the International Monetary Fund (the “IMF”). After news that Greece had shut down its stock market, the local banks instituted capital controls and Greek voters voted against the proposed bailout terms from the European Union, the debacle culminated in a rescue agreement for Greece that is unanimously supported by the Eurozone leaders a few weeks after the close of the quarter. The agreement will now be passed through the legislative bodies for final approval.
An uncertain growth picture in the Chinese economy also caused significant volatility in the markets. After peaking mid-June, the Chinese markets experienced a steep correction, causing the government regulators to intervene after the close of the quarter to halt market operations in an attempt to stabilize the markets. The Chinese central bank also decreased benchmark interest rates and bank reserve requirements to help prop up the economy.
The non-U.S. equity markets rallied early in the second quarter, but ended the quarter in relatively neutral territory. The central banks within Europe, Japan and China continue to loosen their monetary policies. Data in Europe showed signs that the quantitative easing program helped stave off deflation and the European Central Bank (“ECB”) indicated that the program will likely continue until September 2016 or until inflation hits a target of 2%.
The U.S. equity markets ended in flat territory as positive news on corporate earnings and the expanding U.S. economy was overshadowed by the headline risk from Greece. The small growth category was the strongest performing asset class, while mid-capitalization firms were the worst performers. Performance amongst the S&P Index sectors was mixed, and consumer discretionary and healthcare continued their outperformance from the previous quarter while utilities and industrials underperformed.
All fixed income sectors, with the exception of the less interest rate sensitive sectors such as emerging markets debt and high yield, ended the quarter in negative territory. Focus still remains on the U.S. Federal Reserve (the “Fed”) and the timing and velocity of its interest rate lift-off strategy. The 10-year Treasury yield rapidly increased for the quarter ending at 2.3%. The fear of the imminent raising of rates by the Fed outweighed the demand for safe haven assets, such as U.S. Treasuries, as Greece moved towards potential default.
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