By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: May 29

May 29, 2020 | 10:59 AM

Big Picture

N.A. Markets Continue Climbing; U.S.-China Tensions Re-emerge

Optimism over an economic recovery continues to drive markets in the U.S. and Canada. Although U.S. markets were closed for Memorial Day, the TSX started the week off with a strong Monday session, climbing 162 points. However, the bond market provided an interesting contrast, as Canada’s 10-year government bond yield fell below 0.5% on Monday–an indication of just how weak the outlook for the Canadian economy has become.

Investor sentiment was once again positive on Tuesday as U.S. stocks rose sharply, fueled by signs that economic activity has resumed at a faster-than-expected pace in some parts of the country. By Tuesday’s close, the Dow was up 530 points, although gains were pared a bit in afternoon trading as tensions between the U.S. and China continue to grow–this time over possible U.S. sanctions.

N.A. markets climbed even higher on Wednesday as the S&P 500 closed above 3,000 for the first time since March 5, and the Dow breached the 25,000 mark, posting its largest two-day advance–1,083 points–in more than a month.

"overreach"

Red Deer and Red Deer County mayors perplexed over rationale of proposed Bill 20

1h ago

Phase 2 upgrades at Dickson Dam to begin this year

3h ago

charges pending

Red Deer RCMP arrest two individuals following ramming of police vehicle

20h ago

The rally continued in early trading Thursday as U.S. stocks climbed in response to declining U.S. jobless claims. However, gains eroded later in the day as a new standoff emerged between the world’s two superpowers after China voted to override Hong Kong’s autonomy, a decision that could prompt the U.S. to revoke Hong Kong’s special trading status and threaten its standing as an international financial hub. By Thursday’s close, the Dow was down by nearly 150 points.

Although stocks have been on an amazing tear, U.S. consumer sentiment is hovering near the lowest level in nearly a decade. Personal incomes in March suffered the steepest drop since 2013, and consumer spending fell at the fastest rate in over six decades. The numbers for April are expected to be even worse.

In other economic data, the U.S. Commerce Department reported Thursday that Q1 GDP fell at a 5% annual rate–the largest quarterly rate of decline since the last recession. And many analysts are expecting a much bigger contraction in Q2. Forecasting firm IHS Markit projected this week that Q2 GDP would shrink at an annual rate of 39%.

Another Solid Week for N.A. Equities

For the four days covered in this report, the Dow surged 936 points to close at 25,401, the S&P 500 added 75 points to settle at 3,030, while the tech-heavy Nasdaq rose 44 points to close at 9,369. In Canada, the TSX jumped 349 points to end at 15,263.

Strategy

GDP growth in Canada marked its largest contraction since 2009 in 1Q, 2Q likely to be even worse

Canadian GDP growth recorded its largest contraction since 2009 in 1Q20 owing to reduced household spending and widespread shutdowns of non-essential businesses in March, in response to the COVID-19 pandemic.

Output contracted 8.2% on a quarter-over-quarter annualized basis as all accounts contributed to the headline decline. As bad as 1Q was, we expect 2Q will be much worse when strict containment measures and non-essential business closures were in effect for longer.

Statistics Canada also published a preliminary estimate for April that showed an 11% month-over-month decline in output, versus the 7.2% drop in March when restrictions were first imposed halfway through the month. The March reading was revised up from the earlier flash estimate of -9.0%.

Friday’s report showed weakness was broad-based with household spending down 2.3% in the first quarter of 2020, the steepest quarterly drop ever recorded. Substantial job losses, income uncertainty, and limited spending opportunities owning to widespread business closures weighed on consumption in the quarter.

Government outlays fell 1.0%, the largest decline since the first quarter of 2013, reflecting school closures and curtailed government administration.

Business investment was also weak while inventories were drawn down to offset disruptions in global supply chains.

Disclaimer

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