By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: August 9

Aug 9, 2019 | 11:08 AM

Big Picture

Falling Yuan Shakes Global Markets as Trade War Intensifies

It was a rough start to the week for global equity markets, which fell hard Monday on news that China let the yuan tumble beyond the 7-per-dollar level for the first time in more than a decade. In the U.S., the Dow fell more than 760 points, igniting fears that the trade war was quickly developing into a full-scale currency war. A weaker yuan poses serious obstacles for U.S. companies doing business in China, as it raises the cost of their goods for Chinese customers. Safe-haven assets–including the yen, government bonds and gold–rallied. Gold rose to a more than six-year high, while U.S. 10-year Treasury yields declined sharply, hitting their lowest level since November 2016.

U.S. stocks regained some ground Tuesday after China’s central bank stepped in to stabilize the yuan, quelling fears that China was prepared to up the ante. While U.S. markets recovered somewhat, Canada’s main stock index fell on Tuesday, hurt by a slide in the energy and financial sectors. It’s been a rough time lately for oil, which saw prices hit near seven-month lows as worries about slowing global demand took hold.

The rush to safe-haven assets, which has sent global bond yields tumbling, sparked renewed volatility in U.S. markets Wednesday, with the Dow opening sharply lower in early trading before closing slightly in the red.

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Worries over global growth have resulted in a growing international shift toward looser monetary policy. On Wednesday, central banks in India, New Zealand and Thailand all cut interest rates by more than investors had expected.

Finally, markets around the world breathed a sigh of relief on Thursday as China’s central bank set the yuan just above the seven dollar mark, slightly higher than analysts had been expecting.

In North America, the TSX closed up nearly 140 points for the session, while in the U.S., the Dow jumped 371 points and the Nasdaq was up more than 2%.

Markets

U.S. Markets Recovering After Wild Monday; TSX Up

For the four days covered in this report, the Dow surrendered 107 points to close at 26,378, the S&P 500 inched up 6 points to settle at 2,938, while the tech-heavy Nasdaq climbed 35 points to close at 8,039. Closed on Monday, Canada’s main stock index gained 134 points in three sessions to end at 16,405.

Equities/Strategy

Strategy

Challenges ahead amid geopolitical conflicts and slowing global growth. Global growth slowed during Q2/2019 due to trade tensions and policy uncertainty, which continue to cloud the investment outlook for businesses, consumers, and governments alike. At the end of the second quarter, less than 25% of major economies were growing faster than their three-year averages (see Figure 1). Global manufacturing activity has slowed markedly since the beginning of the year. Corporations continue to assess the implications of tariffs, the viability of their supply chains, slowing foreign demand, and expectations for future sales. The services sector has buoyed growth in many regions, but weakness from the manufacturing slowdown is becoming more pervasive.

Figure 1: Less than 25% of major economies growing faster than their 3-year averages

Sources: Scotia Wealth Management, Bloomberg

Importantly, labor markets in many jurisdictions remain healthy, evidenced by stable unemployment, job creation, rising labor force participation, and wage growth. While consumer resilience is encouraging, we remain watchful of potential downside risks to the outlook as we progress through the second half of 2019. Reassuringly, many central banks have indicated a willingness to slow monetary policy normalization or lower interest rates. This should work to offset some of the negative effects from global economic headwinds, support investor sentiment, and ultimately stabilize growth. Our tactical asset allocation recommendations are unchanged at this juncture. They call for neutral equity exposure and underweight positions in fixed income in favour of alternative assets. We maintain our preference for developed markets and high quality issuers with clean balance sheets and sustainable competitive advantages.

(Bill Curry)

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