Trade war rhetoric continued to escalate during June and had a meaningful impact on financial markets.  Oil prices surged—hitting a three-and-a-half-year high late in the month. The Federal Reserve elected to increase policy rates yet again, and signaled the likelihood of four total hikes in 2018. These factors contributed to movement in the currency markets, as the U.S. dollar (USD) rallied against most developed and emerging markets (EM) currencies, serving as a headwind for non-U.S. investments.

EM equities on the whole faltered in June, declining 4.2%.  Through April, EM equities had outpaced the S&P 500 by approximately 1.4%; however, this trend reversed sharply in recent months as EM equities underperformed the domestic equity index by more than 9% YTD.  Chinese equities came under pressure during the month.  China’s locally listed companies, known as A shares, experienced the sharpest decline as the Shanghai and Shenzhen composite indices dropped 8.0% and 19.5%, respectively.  Chinese securities listed on offshore exchanges held up well in June relative to A shares, most notably U.S.-listed Chinese internet names.  Brazilian equities fell 8.3% due to disappointing economic growth and currency declines.  Political uncertainty has also weighed on Brazilian equities.  Frontier equity markets fell 3.5% in June, led by considerable headwinds in Argentina (−22.0%) due to rising inflation and missteps by its central bank.

Commodities finished modestly lower (−2.1%) during the month; however, there was sharp divergence in performance amongst various subsegments as agriculture (−9.9%) and industrial metals (−2.5%) both fell, while energy prices advanced 5.4%. Agriculture declined on concerns that increasing trade rhetoric between China and the U.S. may result in further declines in U.S. grain exports to China.  Industrial metals declined modestly due to fears of slowing Chinese and global growth.  In contrast, crude prices finished the month at a three and-a-half-year high.  A number of supply-related concerns pushed prices higher, including the threat by the U.S. State Department to impose sanctions on companies and countries that do not halt crude oil imports from Iran by November.  Other factors include plummeting production from Venezuela, supply risks in Libya, and larger than expected declines in U.S. inventories.

Hedge funds saw several positive developments with mergers and acquisitions during the month.  The heavily anticipated ruling on the merger between AT&T and Time Warner was announced and the deal was finalized.  Almost immediately after the ruling on the Time Warner/AT&T deal, Comcast made a bid for many of Fox’s assets. Disney had already reached a deal to pay $52.4 billion in stock for the assets, but Comcast came forward with a $65 billion cash offer. In February, Qualcomm agreed to buy NXP with approval from China’s finance ministry.  However, fears of a potential trade war between the U.S. and China emerged and final approval came into question. During June, it appeared deal approval might have a higher likelihood, in part due to the announcement that the U.S. will let China’s ZTE operate in the U.S. again after paying a $1 billion fine.  NXP and Qualcomm also took steps to appeal to China directly, and NXP recently announced an exclusive relationship to provide security features for Baidu Cloud.

 

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