By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: June 2, 2019

Jun 7, 2019 | 10:59 AM

Big Picture

Hopes of Fed Rate Cuts Spurs Market Rally

After a rough two weeks–marked by increasing pessimism over an expanding trade war and waning growth, North American markets got a much-needed jolt Tuesday from the Fed, which hinted that a rate cut might be warranted. Fed Chair Jerome Powell said in remarks Tuesday that the central bank is closely monitoring the recent escalation in trade tensions and that it would respond if needed to keep the economy chugging along. The news sent U.S. markets surging, with the Dow gaining more than 500 points Tuesday, while the Nasdaq recovered nearly 200 points.

While N.A. equity markets have snapped back with three winning sessions, the economic data continues to disappoint. The World Bank this week lowered its global growth forecast for 2019 to 2.6% from 2.9%—and revised its trade-growth forecast to 2.6% from 3.6%. According to the bank, global growth will be the weakest since 2016, while trade growth is set for its weakest showing since the global financial crisis. Underscoring growth concerns was a report that showed U.S. private employers added just 27,000 jobs in May, well below economists’ expectations. Meanwhile, the downturn in Canada’s manufacturing sector deepened in May, as factory activity also slowed in the U.S., Europe and Asia.

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Global bond markets have also caught investors’ attention. U.S. 10-year Treasury yields on Monday hit 2.07%, their lowest mark since September 2017, while German government bond yields fell to an all-time low. Meanwhile, the inversion between U.S. three-month rates and 10-year yields continued for a ninth straight session on Wednesday. Finally, U.S. oil prices entered bear market territory on Wednesday, falling more than 20% below its April peak, as the global-growth worries were compounded by rising U.S. crude inventories. However, oil prices reversed course on Thursday, rising nearly 2% on news the U.S. could postpone tariffs on Mexico.

Markets

N.A. Markets Continue to Struggle

For the four days covered in this report, the Dow surged 906 points to close at 25,721, the S&P 500 gained 91 points to settle at 2,843, while the tech-heavy Nasdaq climbed 163 points to close at 7,616. Despite falling oil prices, the TSX added 191 points to end at 16,228.

Equities/Strategy

Strategy

A U.S. Fed rate cut would prop up inflation and mitigate downside risks, but is not warranted yet. St. Louis Federal Reserve President James Bullard, who is among the more dovish members of the U.S. Federal Open Market Committee (FOMC), said in a speech yesterday that an interest rate cut could soon be warranted to “help re-centre inflation and inflation expectations at target”. Lowering the benchmark rate would also offer some support in case of a sharper-than-expected economic slowdown. Financial markets appear to be predicting lower inflation and growth than the U.S. Federal Reserve currently is, a signal that the Fed’s current policy stance may be too restrictive. According to Mr. Bullard, a rate cut would help to reset expectations and achieve the central bank’s targets sooner. He added, however, that current conditions do not yet warrant a cut.

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