Best Performing Asset Class of H1 2013 is...

The best performing asset class of 2013 year to date are Japanese and US equities with gains of 15.5% for TOPIX, 13.4% for NASDAQ and 13.8% for the S&P 500. These markets have both been spurred on by the implementation of monetary policy from their respective governments. In the US, the Federal Reserve began purchasing $85 billion a month of mortgage backed securities and Treasury securities through QE 3 at the end of 2012. The Bank of Japan announced an addition to their QQE program on April 4th, pledging $1.4 trillion towards the purchase of government bonds in an effort to battle deflation that has persisted for over a decade.

The Bank of Japan is seeking to increase growth and end its deflationary cycle, targeting 2% for inflation by 2015 or early 2016 through the implementation of its monetary policy. With the target for inflation comes the increased likelihood that the equities run will continue as Japanese investors seek to own equities rather than cash as it loses value. The weakening Yen helps as Japanese assets are denominated in foreign currencies and liabilities are denominated in Yen. Additionally, a weaker Yen boosts companies' earnings as the majority of Japanese companies rely on exports for sales.

The month of May was full of speculation leading up to the announcement of the tapering of QE 3 which caused the 10 year US treasury bond yield to rise meteorically from lows of 1.63% to 2.62%, a 100 basis point movement in a little under two months. Speculation as well as the actual announcement on June 19th by Fed Chairman Bernanke caused global investors to move $80 billion from bond ETF's and mutual funds in June alone. Initially, the comments from Bernanke jolted the equities markets, resulting in a 4.8% loss in the S&P 500 and a 4.6% drop in the NASDAQ, but eventually markets managed to resume the bull market trajectory. The resurgence in housing and auto sales has given additional confidence to many US investors and as they compare domestic equities to fixed income areas such as bonds they see more room for the bull market in equities to grow.

Possible Responses to the Uncertain Future of Brazil

The economic situation in Brazil has been divisive for forecasters, with investors uncertain of whether the growth of the global economy will pick up. Some analysts are calling for an increase in growth in H2 of 2013 while others remain skeptical of China's ability to get through the recent cash squeeze. One scenario is that China will be able to transition with minimal difficulty, allowing the recovery of Brazil to hasten and bring more economic certainty. This would contract the spread between Brazil's dollar denominated bonds and the US Treasury bonds, making the option to buy Brazilian bonds and short the US Treasury bonds a possibility. The scenario of China's slowdown lasting longer than anticipated and the impact of the US tapering of QE hitting Brazil harder than people think is very real and due to that, the second scenario offers the possibility of shorting the iShares MSCI Brazil ETF, which was down 16.3% last quarter and could slide much more without a turnaround in sight.

7.5.13 Week in Review

JPY Tankan Large Manufacturer's Outlook came in at 10 vs the expected 7, at its highest since Q4 of 2007. This outlook measures business trends such as anticipated profits and capital investment. The weakened Yen has helped the anticipated Japanese exports and since so much of the Japanese economy consists of exports it is a large indicator of the future direction.

US ISM Manufacturing Index came in at a three month high of 50.9 vs the expected 50.5. The rise shows an increase in optimism for the US to lead growth in the second half of the year. The forecast was put together through a median of 85 economists polled. “The pace of activity at the global level is moderate and stable,” said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. “We are not at a point yet where we are seeing a significant pickup in the growth rate. Our outlook is for growth to pick up a bit, though not extraordinarily so.”

US Unemployment rate came in at 7.6% vs the expected 7.5%. Unemployment has been one of the main areas of concern for the US Fed, having announced that the rate they are looking for before increasing interest rates is around 6.5%. The increase in unemployment moves the Fed further away from the interest rate hike in principle, but they could act without regard to the numbers. The Fed has stated however that they were relying on data rather than a specific date to implement the ending of QE, so that has to be taken into consideration.

US Change in non-farm payrolls showed an added 195K jobs instead of the expected 165K, prompting investors to think that the Fed will maintain its path on QE tapering beginning sooner than later. The addition of workers into the workforce has Ted Wieserman of Morgan Stanley thinking that the unemployment levels quoted as a target for the rate hikes by the Fed could be hit in March of 2015.