Market Watch: Aug. 20, 2021

Market losses continued Wednesday after minutes from the Federal Reserve’s last meeting indicated the central bank could begin the tapering process sometime this year. The Dow plunged 382 points, while the Nasdaq dropped 130, and the S&P shed almost 50 points. The TSX dropped 61 points, as energy prices continued to slide over fears of weakening global demand. With commodity prices under pressure, it’s also shaping up to be a rough week for the loonie, which on Wednesday weakened to its lowest level in nearly four weeks against the U.S. dollar.

In economic news, Statistics Canada reported Wednesday that the annual inflation rate accelerated to a stronger-than-expected 3.7% in July; however, core inflation (a more reliable indicator) was 2.47%, slightly below analysts’ expectations.

In Thursday trading, the TSX continued its longest losing streak in 17 months, notching a sixth day of losses, while U.S. stocks ended the day flat after a choppy trading session.

Markets Lose Ground

For the four trading days covered in this report, the Dow plunged 621 points to close at 34,894, the S&P 500 fell 63 points to settle at 4,405, while the technology-heavy Nasdaq dropped 281 points to close at 14,542. In Canada, the TSX surrendered 303 points to end at 20,215.

Strategy

The July U.S. Federal Reserve minutes did not include any surprises, and we continue to expect an announcement to bemade on tapering asset purchases in the weeks ahead. On the composition of the taper, participants generally agreed that reducing MBS and Treasury purchases equally would be appropriate. Incoming jobs data and the impact from the delta variant will be critical variables for policymakers as they begin to rein in ultra-accommodative policies. To account for a greater-than-anticipated hit, some participants noted that “preparations for reducing the pace of asset purchases should encompass the possibility that the reductions might not occur for some time and highlighted the risks that rising COVID- 19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so dampen the economic recovery.” Fed officials generally expected inflation to ease, with “many” pointing to a few categories dominating the recent rise. Participants would not have seen the July CPI results, in which those factors began to wane. Further out, disagreement on inflation extended in both directions. One faction sees potential for more persistent upward pressure, while “a few” saw data and market-based measures of inflation compensation casting doubt on progress to the inflation mandate. We think our approximate timeline remains appropriate and for the program to be wrapped up by yearend.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Aug. 20, 2021

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