The first half of 2019 ended with a rebound in risk asset performance. Virtually every equity market delivered positive performance in June, including record gains in U.S. equity markets. While uncertainty with regard to trade remains, some positive developments emerged during the month. Perhaps the most significant driver of performance stemmed from dovish guidance by the Federal Reserve and a growing belief by market participants that several policy rate cuts will occur this year. U.S. Treasury yields reflected these expectations. From the three-month Treasury bill to the two-year Treasury note, yields declined approximately 25 bps (adjusted for a modest term premium). Longer-term yields, which reflect growth expectations, also declined. The yield on the 10-year Treasury bond ended the month at 2.00% but fell below this threshold in intra-day trading during the month.
The U.S. dollar weakened. Falling U.S. yields contributed to weakness in the dollar against virtually all major developed and emerging market currencies. The largest gains occurred in European currencies and those located in the Americas. Asia-Pacific currencies delivered positive gains but key currencies such as the Japanese yen (+0.8%) and the Chinese yuan (+0.5%) had more muted increases compared to the rest of the world.
Coming off of a challenging May, U.S. equities rallied in June. The rebound was largely fueled by investor expectations that the Fed will cut rates. Materials was the top performing sector, followed by energy. Technology (+9.1%) was another notable gainer in June and remained the top performing sector for 2019 on the strength of year to date gains from mega caps Microsoft , Apple and Visa. While growth stocks have continued to perform notably better than value stocks in 2019 the Russell 3000 Value Index was narrowly ahead of the Russell 3000 Growth Index in June. There was no material difference in performance across market caps, as the Russell 2000 Index finished the month roughly in line with the Russell 1000 Index.
After posting double-digit losses in May crude oil (WTI) rallied sharply in June. The rally was supported by large declines in U.S. crude inventories, increasing tensions between the U.S. and Iran, and expectations that the Organization of the Petroleum Exporting Countries and Russia would extend their production cuts through the end of 2019. Further, growing optimism about U.S./China negotiations at the end of June helped lift prices. Higher crude prices flowed through to natural resource equities. Year to date, the sector has increased 14.6%. Despite the recent rally, natural resource equities remain out of favor with investors. Oil and gas companies continue to work to regain credibility with investors after falling crude prices and an extended period of focusing on production growth delivered aggregate negative free cash flow. The shale industry is seeking to transition from a growth phase to a harvest phase. Many are attempting to transition to a self-funding model in which more modest growth goals are focused on low-cost production and are funded through internal cash flow rather than issuance of debt or equity in the public markets.