Weekly Market Commentary

The Dow Jones Industrial Average gained 104 points for the week, up 0.6% to 17,477. The S&P 500 Index was up 14 points, or 0.7%, to finish at 2,092.  The Nasdaq Composite added 0.1% to close at 5,048. The S&P MidCap 400 Index closed the week at 1,502, up 0.9%. The Russell 2000 advanced 0.5% to end the week at 1,213.  

The MSCI ETF "EFA", the proxy for developed international equity markets, was down -0.9% for the week. Emerging markets, as represented by the MSCI ETF "EEM", fell -2.1%.  Domestic High Yield corporate bonds were off -0.6% for the week, as measured by the Bank of America Merrill Lynch US High Yield Master II Index.  

US Stocks moved marginally higher for the week, while global stocks turned slightly negative after a series of surprise currency devaluations from China's central bank sparked concerns over a potential global currency war.  The yield on the benchmark 10-year US Treasury note slipped to a threemonth low of 2.08% before recovering to close out the week at 2.19%.  Oil prices were relatively flat for the week, with West Texas Intermediate at $42.56 a barrel and Brent Crude at $49.02.  High-yield bond funds posted their third straight week of net outflows as investors withdrew $1.2 billion in the week ended August 12th.  Investors are clearly going "riskoff" across asset classes, as investment-grade funds also saw large outflows of $1.8 billion and US equity funds experienced a $1.5 billion outflow.  Investors are parking their cash in safe-haven money market and US Treasury funds, which saw inflows of $6 billion and $601 million, respectively, during the same time period.    

High-yield bond issuers returned to the market in the week ended August 7th, issuing $4.135 billion over 8 transactions.  The Effective Yield on the Bank of America Merrill Lynch US High-Yield Master II index spiked to 7.69% as of August 13th.  The Option-Adjusted Spread (OAS) rose to 6.04%, the highest level since August of 2012.  OAS is a measure of the spread on high-yield debt over the risk-free rate, accounting for prepayment risk via embedded options.  While investors are receiving relatively greater yields in the high-yield market as of late, they are foregoing traditional investor protections in the process.     

The Moody's high-yield bond Covenant Quality Index (CQI), which tracks the quality of investor protection mechanisms embedded in high-yield bond transactions on a rolling 3month basis, weakened to 4.37 in July.  The CQI measures bond covenant quality on a five point scale, with 1.0 denoting the strongest level of investor protection and 5.0 being the weakest.  The single month measure in July was 4.6, the worst-ever reading.    

In US economic news, Producer Price Index data for July pointed to a 0.2% rise for the month, with the year-on-year change at -0.8%.  Energy prices, which fell -0.6% in July and are down -17.6% for the year, will likely continue to decline next month and keep the Fed hawks at bay.  Industrial production posted a solid gain of 0.6% in July, beating the consensus estimate of 0.4%.  Retail sales rose 0.6% in July, largely driven by a 1.4% increase in vehicle sales.  The Labor Department's Job Openings and Labor Turnover Survey (JOLTS) showed a contraction in job openings from 5.357 million in May to 5.249 million in June.  Layoffs increased from 1.2% to 1.3%.  Weekly jobless claims remain low, at 274,000 for the week ended August 8th.  The less-volatile four-week moving average was down 1,750 to 266,250.  Continuing claims, reported on a one-week lag, rose 15,000 to 2.273 million.  

In international economic news, China's central bank initiated currency controls, devaluing the yuan in successive moves by 1.9%, 1.6%, and 1.1% over the course of three days.  Asian currencies sold off sharply in response, over fears that the weaker Chinese yuan will negatively impact the competitiveness of neighboring countries.  In European news, Eurozone GDP rose 0.3% in the second quarter, below the anticipated pace of 0.4%.