Market Watch – August 31, 2018

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Finally, U.S. corporate profits boomed in Q2, boosted by large tax cuts and stronger economic growth than initially reported. According to the U.S. Commerce Department, after-tax profits across the U.S. rose 16.1% versus Q2 2017, the largest year-over-year gain in six years.

Mourning the loss

Hope Mission reports overdose death outside temporary emergency homeless shelter

8h ago

Last seen on April 6

Missing: Diane Cooper, 82, of Consort

8h ago

6 to 8 p.m.

MLA Jason Stephan to hold public town hall on Thursday

9h ago

Markets

North American Markets Respond to NAFTA, Tariffs

Markets were buoyed by signs of NAFTA progress early in the week but surrendered some gains Thursday over tariff concerns. For the four days covered in this report, the Dow gained 197 points to close at 25,987, the S&P 500 climbed 26 points to end at 2,901 while the tech-heavy Nasdaq climbed 142 points to settle at 8,088. In Canada, the TSX was up slightly, adding 16 points over the period to close at 16,372.

Investment Strategy

We recommend a selective approach when adding exposure to international equities. International equity volatility remains elevated amid continued trade concerns (particularly between the U.S. and China), USD strength, and contagion worries (unfounded, in our view) from the collapse of Turkish lira and Argentine peso. Weaker developing economies (such as Turkey and Argentina) with higher levels of USD-denominated debt should continue to face pressure in servicing their foreign-currency debt if the U.S. Federal Reserve continues to raise interest rates and USD strength persists. YTD, European and EM equities, as represented by the MSCI European Economic and Monetary Union Index and the MSCI Emerging Markets Index, respectively, have meaningfully underperformed their U.S. counterparts (S&P 500 Index). Through August 30th, the former two indices have delivered total returns in USD terms of -1% and -7%, respectively, versus the S&P 500’s 10% advance.

Recent USD weakness has provided near-term support to international equities. However, in our view, a meaningful rerating of international equities depends on sustained USD weakness and greater clarity regarding global trade. The same could be said of U.S. large-cap companies, given these firms’ multinational footprints and relatively high international revenue exposure. On the other hand, we believe sustained USD strength would favor domestically-focused U.S. companies (small and mid-cap firms) and international companies with relatively high USD revenue exposure. Assuming USD strength persists, we believe investors looking add international equity exposure could benefit by favouring sectors and companies with leverage to the United States. In Europe, we believe sectors such as technology (~48% of revenues from the U.S.), healthcare (~48%), business services (~39%) and industrials (~35%) would fit the bill. Similarly, in emerging markets, technology companies (~53% of revenues from the U.S.) could benefit from a strong USD.

(Big Picture – By Bill Curry)

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