By ScotiaWealth - The Zukiwsky Group (Sponsored)

Market Watch – July 27, 2018

Jul 27, 2018 | 11:41 AM

Big Picture By Bill Curry

U.S., EU Look to Avert Trade War; Loonie Regains Ground

Markets eased a sigh of relief late Wednesday and U.S. stocks surged in response to news that the U.S. administration had secured some trade concessions from the European Union. The two parties agreed to lower industrial tariffs and increase natural gas and soybean exports to Europe, while also working to resolve issues surrounding the current steel and aluminum tariffs. Trump also indicated he’s willing to hold off on proposed auto tariffs – good news for shares of carmakers. While progress between the U.S. and EU was welcome news, reports indicate that market volatility and trade tensions have been driving many investors out of U.S. stocks in favour of less risky assets, such as U.S. Treasurys. According Morningstar data, more than $20 billion in June was pulled from mutual funds and ETFs focused on U.S. stocks, capping the third-worst first half for equity flows over the past decade. Meanwhile many analysts are lowering their expectations for U.S. Q2 growth in response to the latest data about factory orders, international trade and business inventories. The Commerce Department reported new orders for durable goods increased a seasonally adjusted 1% in June from the month prior – smaller than the 3% gain economists were expecting. In Canada, the loonie headed higher on Wednesday and Thursday, holding near its best level in six weeks. The Canadian dollar is currently buoyed by better-than-expected economic data and a weaker U.S. dollar, which has hovered near two-week lows. Finally, in a policy statement Thursday the ECB held rates steady but reiterated its intention to phase out its €30 billion a month bond-buying program by December. While there’s growing confidence in the union’s economic recovery, ECB officials are closely monitoring recent signs of an economic slowdown, as well as trade developments with the U.S. Forecasters are currently looking to September 2019 as the earliest possible date for a first ECB rate increase.

North American Markets Head Higher

Trade progress between the U.S. and EU on Wednesday helped to lift North American markets. For the four days covered in this report, the Dow gained 469 points to close at 25,527, the S&P 500 climbed 35 points to end at 2,837 while the Nasdaq added 32 points to settle at 7,852. In Canada, the TSX rose 20 points over the period to close at 16,456.

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Equities

We continue to recommend overweight exposure to equities and underweight exposure to fixed income, relative to our long-term strategic asset allocation model. We acknowledge trade risks and flattening yield curves could weigh on equity market sentiment. The difference between 10-year and 2-year U.S. Treasury yields (the “slope” of the curve) dropped from ~50 bps in mid-May to ~25 bps in mid-July. Ongoing U.S. Treasury note auctions and additional U.S. Federal Open Market Committee (FOMC) rate hikes this year (the FOMC itself expects two more) suggest the U.S. Treasury yield curve could continue flattening. Historically, the slope of the yield curve has been a reliable economic recession indicator. Since 1980, U.S. yield curve inversion (when short-term yields first exceed long-term yields during a particular economic cycle) has preceded the start of the next U.S. recession by at least 20 months. That said, owing to the unprecedented scale of central bank market intervention since the last U.S. recession, some market observers argue yield curve inversion may now be a less meaningful signal than it has been in the past. At the moment, the probability of a U.S. recession within the next twelve months remains low based on data we monitor. Until this changes, we intend to retain our current tactical asset allocation recommendations.

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.

by ScotiaWealth - The Zukiwsky Group (Sponsored)

Market Watch – July 27, 2018

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