Highlights

  • China’s latest export: deflation. While the rise, falter and subsequent intervention in Chinese stocks seems spectacular, the larger issue remains China’s economic outlook. The perception is China suffers from a loss of credibility and questions about its ability to implement further reforms. And the reality is markets are reacting to weak economic data (ignoring the roundly questioned official second quarter figures) as well as capital outflows. The upshot: A flatter Chinese economic outlook is renewing declines in commodity prices.
  • Wages vs. commodities. Falling commodity prices reflect global growth concerns, primarily from China, and point to important shifts in the fixed income investment landscape. Already inflation expectations have followed commodity prices lower, unwinding some of the year’s earlier recovery. Where today the market focuses on declines in headline inflation, over the longer run, the focus should be on core. Here the outlook for wage inflation becomes the important factor. Yet the latest indicators point to few signs of rising wage pressure despite tightness in labor markets. Eventually, that pressure will emerge.
  • Credit risks and opportunities. Falling commodity prices significantly impact the outlook for credit investments. Declines in energy prices relate not only to supply factors (e.g., U.S. shale and inventories, Iran and Saudi supply), but also to prospects for easing Chinese demand. Falling prices for oil and iron ore reflect the weakening China outlook. The impact on credit has been substantial, with some energy- and metals-related bonds falling 10–25 points. Declines of that size suggest both rising risks and opportunities for credit investors.

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The sector performance and yields listed are represented by, respectively: Barclays US High Yield Index, S&P Leveraged Loan Index, Barclays US Securitized Ex-MBS Index, Barclays US Mortgage Backed Securities Index, Barclays US Corporate Investment Grade Index, Barclays Global Aggregate ex-USD Index, JP Morgan EMBI Global Diversified Index, Barclays US Inflation Protected Securities Index and Barclays US Treasury Index. The reference indices are represented by the Barclays US Aggregate and the Barclays Municipal Bond Index.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

The opinions expressed are those of BlackRock as of Aug. 3, 2015, and may change as subsequent conditions vary. Information and opinions are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable. The information contained in this report is not necessarily all-inclusive and is not guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. Reliance upon information in this report is at the sole discretion of the reader.

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