By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: May 10, 2019

May 10, 2019 | 10:05 AM

Big Picture

Markets Unsteady as Trade Standoff, Tariffs Take Centre Stage

What a difference a week makes. Markets began Monday trading on shaky ground following a Sunday tweet from U.S. President Donald Trump threatening to ramp up U.S. tariffs on $200 billion in Chinese imports to 25%–up from the current 10%–and effectively scuttle a potential trade deal between the two countries. After sliding more than 450 points during Monday’s morning trading, the Dow steadily climbed back during the afternoon as many investors discounted Trump’s threat as a negotiating tactic ahead of a new round of trade talks set to begin Thursday in Washington. However, North American markets declined sharply on Tuesday as investors braced for the increased likelihood the U.S. would indeed raise tariffs on Friday. U.S. Treasury yields moved lower as investors turned to fixed income for safety and began unloading risk. By the end of trading Tuesday, the Dow tumbled 473 points, the Nasdaq was down 159 and the TSX surrendered more than 140 points. While the Dow and TSX regained ground on Wednesday, the S&P 500 fell for a third consecutive session, as investors learned of serious, substantive setbacks in trade negotiations. By Wednesday’s close, the index had lost more than 2% over three trading sessions, the worst stretch since the late December sell-off that left the S&P precariously close to bear-market territory. In Asia, the Shanghai Stock Exchange dropped 1.1%, while Hong Kong’s Hang Seng Index was also down 1.2%. In Thursday trading, the Dow slid more than 400 points early on over news that the U.S. and China were still far away from an agreement heading into negotiations but recovered some ground later as Trump mused that a deal was still possible. By day’s end, red numbers prevailed across the board, with both the S&P and Nasdaq extending their losing streak to four straight sessions. As if investors didn’t have enough to worry about: on Thursday came news that the yield curve inverted for the first time since March.

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Markets Stumble as Trade Tensions Reemerge

For the four days covered in this report, the Dow tumbled 677 points to close at 25,828, the S&P 500 shed 75 points to settle at 2,871, while the tech-heavy Nasdaq dropped 253 points to close at 7,911. In Canada, the deteriorating trade negotiations weighed on the TSX, as Canada’s major index lost 172 points to end at 16,322

Equities/Strategy

Strategy

Data-dependency and optimism: the U.S. Federal Reserve’s new balancing act. The Federal Open Market Committee (FOMC) held its policy rate unchanged at its meeting last week and managed to strike a fairly balanced tone in the accompanying statement and press conference. The FOMC acknowledged economic fundamentals have improved recently, but near-term uncertainties continue to warrant a data-dependent approach to monetary policy. Importantly, the committee sees sustained economic expansion, strong labour market conditions, and inflation near 2% as the most likely outcomes over the long-term. Fed Chairman Jerome Powell spoke positively about recent developments in the domestic and global economy and seemed unconcerned with softer core personal consumption expenditures inflation, at least for the time being. The committee believes the recent weakness is the result of transitory effects and would need to see a prolonged period of below-trend readings to be convinced otherwise. Mr. Powell emphasized that risks to the global outlook have eased, underpinned by improving data in China and Europe, though his comments regarding U.S.-China trade talk progress may have been premature. We continue to expect geopolitical risks and policy uncertainty to dissipate in 2019, allowing the Fed to resume policy normalization later this year or early in 2020.

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