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There were few economic releases this week, but none of those releases mattered to the capital markets. In the U.S., the releases showed a strong demand for labor. Elsewhere, the economic releases were softer. Earnings reports for the 2nd quarter provided upside surprises. Yet, geopolitical unrest, not economic nor earnings drove the capital markets this week. Equity markets sold off and credit spreads widened in this "risk-off" week. Government bond yields fell in a flight to safety amidst geopolitical unrest. The US dollar was mixed, Oil and corn commodity prices fell, and metals and natural gas commodity prices rose on the week.
Perspective:
Two conversations this past week raised some issues that I had not fully appreciated. The first conversation was with a visiting close friend, who had built a great business serving the public relations needs of the hedge-fund industry. When I suggested that he invest his assets in low-cost, diversified indexed funds, he reminded me that many investors need to be advised on their assets; they have not read all the academic literature and invested in the markets professionally as I had over the past 40 years. Point made.
The second conversation was with head of a local nonprofit who was getting suggestions from her board on how she should be investing their endowed assets. She was looking for an independent opinion on their recommendations. She was aware that as a volunteer board member I had helped to steer other local nonprofits to low cost indexed solutions to their investment challenges.
My active career in investment management was on the institutional side. I have brought that experience to my retired life as a volunteer on non-profit boards and investment committees. In both the conversations above I realize that many have the need of advice. Yet, what is the nature of that advice, at what costs, and how can that be obtained? I don't have a good answer, but I now have a greater appreciation of their dilemmas.
On a personal note, this coming week marks another year of my life. It is not a "significant" birthday, ending in zero. Yet, when friends and family travel to celebrate, it is significant to me.
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Other U.S. Releases:
In the second quarte,r Non-farm Productivity rose +0.9% and Unit Labor Costs rose +0.6%; while the Unit Labor Costs were lower than expected, 1st quarter ULC were revised sigificantly up to 5.4% from the original release of 2.2%.
Source: Econoday and the Wall Street Journal
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Economic Releases: US Employment
Initial Claims for Unemployment Benefits rose to 244,000 the week of August 5th. The 4-week average of Claims (blue in the chart below) slipped to 241,000. Continuing Claims (red in the chart below and reported on a 1-week lag) fell 16,000 to 241,000. Both readings were at historic lows and evidence of strong demand for labor. In other readings, the DOL's JOLT (Job Openings and Labor Turnover) report showed that Job Openings rose to 6.162 million in June, above the range of expectations, but Hires fell to 5.356, showing the difficulty that firms have in finding qualified candidates.
Source: St Louis Federal Reserve, FRED, Econoday via WSJ.com
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Economic Releases outside the U.S.
Germany's Industrial Production (IP) fell -1.1% in June, an increase of only 2.5% over a year ago. France's June IP also fell by the same measure. In the UK, IP rose +0.5% in June; Manufacturing output was flat.
In Japan, Machine Orders fell -1.9% in June.
Source: Econoday and the Wall Street Journal
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Equity and Bond Index Returns:
Equity markets reacted negatively to the geopolitical risks associated with the verbal exchanges and threats. Positive earnings reports had no impact; Factset reported that with over 90% of the companies having reported Q2 earnings, 73% reported earnings above the mean estimates and 69% reported revenues above mean estimates. With this week's sell-off the P/E on Factset's Forward Earnings eased back to 17.4, still high relative to the year-end P/E of 16.9 and the 5- and 10-year averages of 15.4 and 14.0.
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Equity Indices % Change
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Price
|
% chg
|
QTD
|
YTD
|
'08-'16
|
|
|
08 /11/ 17
|
08 /04/ 17
|
06 /30/ 17
|
12/30/16
|
12/31/08
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Dow Jones Industrials
|
21,858
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-1.1%
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2.4%
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10.6%
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125.2%
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S&P 500 Index
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2,441
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-1.4%
|
0.7%
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9.0%
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147.9%
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Nasdaq
|
6,257
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-1.5%
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1.9%
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16.2%
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241.3%
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S&P/TSX Composite
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15,033
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-1.5%
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-1.0%
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-1.7%
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70.1%
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FTSE 100 Index
|
7,310
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-2.7%
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-0.0%
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2.3%
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61.1%
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CAC 40 Index
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5,061
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-2.7%
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-1.2%
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4.1%
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51.1%
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DAX Index
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12,014
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-2.3%
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-2.5%
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4.6%
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138.7%
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Swiss Market Index
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8,884
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-3.2%
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-0.3%
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8.1%
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48.5%
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Nikkei 225 Index
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19,730
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-1.1%
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-1.5%
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3.2%
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115.7%
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HK Hang Seng Index
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26,884
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-2.5%
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4.3%
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22.2%
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52.9%
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Shanghai CSI 300
|
3647
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-1.6%
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-0.5%
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10.2%
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82.1%
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Bond Indices % Total Return
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|
|
|
|
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Bloomberg Treasury Index
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127.5
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0.5%
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0.8%
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2.7%
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19.5%
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Bloomberg Corporate Index
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150.4
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-0.1%
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0.8%
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4.7%
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72.1%
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Bloomberg High Yield Index
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179.4
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-0.7%
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0.6%
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5.6%
|
167.4%
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S&P 500 Valuation
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|
|
|
|
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Factset forward Earnings
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$140.21
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$134.91
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$132.79
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5-Year Ave
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% Change in Earnings
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|
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0.9%
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5.6%
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15.4
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|
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10-Year Ave
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Price/Earnings Ratio
|
17.4
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|
17.4
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16.9
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14.0
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Data Source: Bloomberg app for the Iphone; Earning Estimates from Factset
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Bond Yields and Spreads:
Government Bond yields fell on the week in a flight to safety. Similarly, credit spreads widened for both investment grade and high yield sectors in this "risk-off" week. As a result, the Bloomberg Treasury Index posted a positive return, but the Corporate and High Yield Indices posted negative returns on the week.
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Government Bonds
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Bond Yields (%)
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bp chg
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QTD
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YTD
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'08-'16
|
|
|
08 /11/ 17
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08 /04/ 17
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06 /30/ 17
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12/30/16
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12/31/08
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UST 2-Year
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1.29
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-6
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-9
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10
|
42
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UST 10-Year
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2.19
|
-7
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-11
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-25
|
23
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US TIP 10-Year
|
0.37
|
-8
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-17
|
-9
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-163
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UST 30-Year
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2.79
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-5
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-4
|
-28
|
39
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Canadian 10-Year
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1.85
|
-7
|
8
|
14
|
-97
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UK 10-Year
|
1.06
|
-11
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-19
|
-17
|
-179
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French 10-Year
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0.67
|
-7
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-14
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-1
|
-273
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German 10-Year
|
0.38
|
-8
|
-8
|
18
|
-275
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Swiss 10-Year
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-0.22
|
-10
|
-15
|
4
|
-236
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Japan 10-Year
|
0.05
|
-1
|
-2
|
1
|
-113
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Bloomberg Credit Spreads
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|
bp chg
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bp chg
|
bp chg
|
bp chg
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Corp OAS BUSC
|
114
|
8
|
2
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-14
|
-445
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HY OAS BUHY
|
398
|
32
|
22
|
-31
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-1374
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Rates
|
|
bp chg
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bp chg
|
bp chg
|
bp chg
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US Mort 30-yr %
|
3.76
|
-7
|
-9
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-33
|
-117
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Spreads
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|
|
|
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10-Year TIPS Spread
|
1.82
|
1
|
6
|
-16
|
185
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Yield Curve (2's to 10's)
|
0.90
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-1
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-2
|
-35
|
-20
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Yield Curve (10's to 30's)
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0.60
|
2
|
7
|
-3
|
17
|
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Yield Curve (2's to 30's)
|
1.50
|
1
|
5
|
-38
|
-3
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Data Source: Bloomberg app for the Iphone
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Currency and Commodity Markets:
The US dollar was mixed, gaining on the Pound and Loonie, but slipping against the RMB, Euro, and Yen. Oil and Corn commodity markets fell, but metals and natural gas commodity prices gained on the week.
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Currencies vs $
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Closing
|
% chg
|
QTD
|
YTD
|
'08-'16
|
|
|
08 /11/ 17
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08 /04/ 17
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06 /30/ 17
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12 /30/ 16
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12 /31/ 08
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Yen
|
91.58
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1.4%
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3.0%
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7.1%
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-22.5%
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British Pound
|
1.30
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-0.2%
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-0.1%
|
5.6%
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-15.5%
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Euro
|
1.18
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0.4%
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3.5%
|
12.4%
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-24.7%
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Canadian Dollar
|
78.88
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-0.3%
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2.3%
|
6.0%
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-9.5%
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China Renminbi
|
15.01
|
1.0%
|
1.8%
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4.2%
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-1.6%
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Commodities
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|
|
|
|
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WTI
|
$48.82
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-1.5%
|
5.6%
|
-9.3%
|
20.7%
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Brent Crude
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$52.10
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-0.4%
|
6.7%
|
-8.3%
|
58.6%
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Natural Gas
|
$2.98
|
7.5%
|
1.0%
|
-20.2%
|
-35.6%
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Spot Gold
|
$1289
|
2.4%
|
3.9%
|
12.0%
|
32.4%
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Spot Silver
|
$17.12
|
5.2%
|
3.1%
|
7.4%
|
40.7%
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CBOT Corn
|
$374.75
|
-1.6%
|
-3.4%
|
6.5%
|
-2.1%
|
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Spreads
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|
|
|
|
|
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Brent-WTI
|
$3.28
|
$2.75
|
$2.63
|
$2.98
|
-$8.78
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|
|
|
|
|
|
|
|
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South African Rand
|
7.42
|
-0.1%
|
-2.8%
|
2.1%
|
-25.9%
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Data Source: Bloomberg app for the Iphone
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Equity Index Gains in US dollar terms:
The equity table above shows the percent change of different stock indices in terms of its local currency. To calculate the return to the US dollar investor one must combine the change of each index with the change in the applicable currency. The following table shows the 5-day, quarter-to-date and year-to-date results of investments made in each index in US dollar terms:
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Return to USD Investor
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|
% Chg
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QTD
|
YTD
|
|
|
08 /11/ 17
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since:
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08 /04/ 17
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06 /30/ 17
|
12/30/16
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'08-'16
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S&P 500 Index:
|
USD
|
-1.4%
|
0.7%
|
9.0%
|
147.9%
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Nikkei 225 Index:
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Yen
|
0.2%
|
1.4%
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10.6%
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67.3%
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FTSE 100 Index:
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Pound
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-2.9%
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-0.2%
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8.0%
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36.0%
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DAX Index:
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Euro
|
-1.9%
|
0.9%
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17.6%
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79.7%
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CAC 40 Index:
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Euro
|
-2.3%
|
2.3%
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17.0%
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13.7%
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S&P/TSX Composite:
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CAD
|
-1.7%
|
1.3%
|
4.2%
|
54.0%
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Shanghai CSI 300:
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Yuan
|
-0.7%
|
1.2%
|
14.8%
|
82.1%
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For US dollar investors, the Asian Indices, Nikkei and CSI, generated better returns than the S&P 500 this week.
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Disclaimer:
The views discussed herein are exclusively those of John W. Davidson. These views are not meant as investment advice, and are subject to change. Information contained herein is derived from sources believed to be reliable, however, Mr. Davidson does not represent that the information is complete or accurate and therefore, should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information purposes only, and does not pertain to specific investment objectives, the financial situation or the particular needs of any specific person or investor who might receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or utilizing any investment strategy discussed or recommended in this report, and should understand that statements regarding future investment prospects may not be realized. No part of this report may be reproduced in any manner without the express written permission of Mr. John W. Davidson. Should you wish to be removed from this distribution please utilize the Safe Unsubscribe link below.
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