By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: June 21

Jun 21, 2019 | 11:20 AM

Big Picture

Fed Holds Steady, But Rate Cuts Expected Later This Year

The Federal Reserve held its benchmark interest rate steady on Wednesday but signaled rate cuts in the months ahead were a real possibility if the economic outlook weakens. U.S. inflation this year has held below the Fed’s 2% target, with prices up 1.6% in April (excluding food and energy). Additionally, hiring slowed in May, with the three-month monthly payroll growth off nearly 100,000 from January; while the unemployment rate held steady at 3.6% in May, a 49-year low. U.S. stocks rose to session highs after the decision. The Dow, which was up 6.9% this month on Wednesday, is on track for its best June in nearly nine decades. The S&P 500 has rallied 6.2% this month and hit a record close Thursday.

On Tuesday, major global indexes surged after European Central Bank President Mario Draghi signaled the ECB could cut rates and expand its bond-buying program to shore up eurozone inflation. Also adding to investor optimism, President Trump and China’s Xi Jinping agreed to meet at the G20 summit in Japan, sparking hopes for a trade truce and driving U.S. indexes to near-record highs.

While equity markets have responded positively to dovish central banks, the falling U.S. 10-year yield suggests a less rosy picture. Surging demand for U.S. government debt drove 10-year Treasurys below 2% on Thursday. Plummeting yields aren’t just an American phenomenon. In the U.K., 10-year yields on Thursday hit 0.8% after a downbeat economic assessment from the Bank of England. Elsewhere in Europe, Italian 10-year yields have fallen sharply, while German yields are still in the red at –0.3%.

sept. 19

Pair arrested after daylight shooting in Red Deer

9h ago

FIRE AND FLOOD MITIGATING, PATENTED TECH

Fire and Flood Emergency Services celebrates new headquarters and technology upgrades

9h ago

Frost Expected Overnight

Frost Advisory issued for Red Deer and surrounding areas

13h ago

Meanwhile in Canada, the annual inflation rate jumped in May, driven by climbing prices on vegetables and passenger vehicles. Canada’s consumer-price index increased 2.4% year-over-year in May, versus a 2% rise in April. While the jump was surprising, it is unlikely to change the BoC’s interest-rate outlook. Finally, oil futures surged Thursday as tensions in the Middle East were ratcheted up after Iran reportedly shot down a U.S. drone.

Markets

N.A. Markets Relatively Calm Before Next Week’s Fed Meeting

For the four days covered in this report, the Dow added 663 points to close at 26,753, the S&P 500 gained 67 points to settle at

2,954, while the tech-heavy Nasdaq climbed 254 points to close at 8,051. In Canada, the TSX was 273 higher to end at 16,575.

Equities/Strategy

Equities

Tariffs could depress U.S. corporate earnings by 5%-10% in a worst-case scenario. The scenario analysis in Figure 1 depicts how tariffs on U.S. imports of Chinese goods may affect corporate margins and earnings. We used imports from China as a percentage of U.S. GDP to approximate the percentage of U.S. corporate costs tied to Chinese goods. We then assumed a 50%/50% fixed/variable cost structure to estimate the effect of tariffs on profitability. Further, we adjusted sales growth (consensus for 2019 is ~4%) to show how a positive, or negative, sales surprise could lessen, or deepen, the effect of tariffs.

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