By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: Nov. 8

Nov 8, 2019 | 10:12 AM

Big Picture

U.S. Markets Post Record-Closing Highs; TSX Extends Winning Streak

It was an auspicious start to this week’s trading as all three major U.S. indexes posted record-closing highs on Monday, extending a recent winning streak based largely on trade optimism and better-than-expected corporate earnings. Although profits are on track to decline for a third consecutive quarter, over 75% of S&P 500 companies that have reported have beaten analysts’ expectations. There was more good news on Tuesday for U.S. markets as U.S. service-sector activity grew at a faster pace in October than in September, a sign that the U.S. consumer is still spending, despite a marked manufacturing slowdown. The Dow and S&P were flat on Wednesday, weighed down by energy shares. It’s been a tough time for the sector as energy stocks are underperforming commodities prices, suggesting investors are reluctant to invest, regardless of short-term oil prices. U.S. markets surged again, however, on Thursday as hopes for a trade deal gained steam.

In Canada, the TSX hit a six-week high on Thursday, also lifted by signals that a “phase one” trade deal was close to becoming a reality. It’s been a strong week for Canada’s main stock index, which posted its fourth positive session on Thursday. The loonie was also fairly stable versus the greenback on Thursday, bouncing back from an earlier eight-day low as Canada looks toward its domestic jobs data, which is due on Friday.

Also benefiting from trade optimism this week was the Chinese yuan, which hit its strongest level in three months on Tuesday, rallying just below the symbolic 7-per-dollar mark.

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Finally, the European Union has cut its economic forecast. In its quarterly report, EU officials predicted GDP for the 19-member eurozone to grow just 1.1% in 2019, revised down from its July forecast of 1.2%.

Markets

Trade Hopes Lift N.A. Markets

For the four days covered in this report, the Dow surged 328 points to close at 27,675, the S&P 500 rose 18 points to settle at 3,085, while the tech-heavy Nasdaq climbed 49 points to close at 8,435. In Canada, the TSX jumped 212 points to end at 16,806.

Equities/Strategy

Strategy

Monetary policy accommodation has likely lengthened the current business cycle. Central bank policymakers continue to demonstrate a strong willingness to stabilize global economic growth, as evidenced by the more than thirty central banks that have eased policy in 2019. The U.S. Federal Open Market Committee has lowered the target range for the federal funds rate by 75 basis points (bps) since July to 1.50%-1.75%, a stark contrast to the 50 bps of tightening priced in late last year. The Fed is also expanding its balance sheet at a rate of US$60 billion per month in response to liquidity constraints in U.S. money markets, further easing financial conditions. With its latest decision in October, the Fed asserted that its current policy stance is likely to remain appropriate as long as incoming information about the U.S. economy remains consistent with the Fed’s outlook. That is to say, the Fed’s policy interest rate is likely to remain unchanged heading into 2020 barring a significant weakening of economic fundamentals. While investors have lauded the efforts of monetary authorities to support global economic growth, they have also called for complementary fiscal stimulus to help revive domestic demand and support consumers and local businesses. While a handful of nations have been receptive to this idea, a more coordinated effort likely will be needed for it to bear fruit. We expect a modest improvement in global growth in 2020, aided by policy accommodation, but believe risks are skewed to the downside.

(Bill Curry)

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