By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: Sept. 27

Sep 27, 2019 | 9:52 AM

Big Picture

Impeachment Inquiry Weighs on U.S. Markets; TSX Down for Fourth Session

U.S. markets turned volatile this week as the U.S. House of Representatives on Wednesday launched an impeachment inquiry into President Donald Trump. At issue is a July call Trump made to Ukrainian President Volodymyr Zelensky and whether Trump used American foreign policy to try to damage political rival Joe Biden. On Tuesday, U.S. stocks fell in a volatile trading session as initial calls for impeachment grew louder. While U.S. markets actually bounced back on Wednesday over U.S.-China trade optimism, the growing political uncertainty soured investor sentiment on Thursday, sending all three major U.S. indexes into the red.

Meanwhile, U.S. consumer confidence slipped in September, the biggest drop in nine months, and U.S. manufacturing activity across the mid-Atlantic states softened. The weaker economic data helped lift gold prices, which rose to their highest levels in more than two weeks on Tuesday.

In Canada, the TSX dropped for the third straight session on Wednesday, hurt by declines in energy and materials stocks. It’s been a tough week for the energy sector, which saw oil prices plunge more than 2% Tuesday and over 1% on Wednesday as oversupply concerns continue to linger. However, the TSX eked out a slight gain on Thursday, inching up 6 points. In currency news, the loonie strengthened to a 10-day high against the U.S. dollar on Thursday after stronger-than-expected wholesale trade data and a pick-up in employee wages.

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Turning to Europe, data on Monday showed Germany’s manufacturing and services sectors weakened more than expected in September, adding to investors’ worries about the health of Europe’s biggest economy. German manufacturing has become a real concern, as the country’s Purchasing Managers Index for September hit its lowest level in more than a decade.

Markets

N.A. Markets Surrender Ground

For the four days covered in this report, the Dow lost 44 points to close at 26,891, the S&P 500 dropped 14 points to settle at 2,978, while the tech-heavy Nasdaq declined 87 points to close at 8,031. In Canada, the TSX surrendered 110 points to end at 16,790.

Equities/Strategy

Strategy

U.S. Federal Reserve’s suite of communications pushes back against a market priced for future easing. The Federal Open Market Committee (FOMC) voted 7-3 in favour of a 25bps rate cut to lower the federal funds rate target range to 1.75%-2.00%. Two members preferred no change, and one preferred a 50bps reduction.

However, the communication package pointed to a more hawkish than expected Fed, as only moderate policy changes were deemed necessary to sustain the expansion. Updated federal funds rate projections revealed a divided committee, with the median forecast indicating no change for the rest of 2019 and 2020 and a quarter-point hike in each of 2021 and 2022. Importantly, even the most dovish members of the FOMC see just one more rate cut this year and no cuts thereafter.

This is in stark contrast with current market pricing, which reflects expectations for roughly 3 more 25bps rate cuts in the next twelve months. The market expects the FOMC to hold its policy rate range steady at its October meeting and to reduce rates by 25bps in December.

(Bill Curry)

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