Market Watch: Thanksgiving long weekend

Early in the week, optimism was tempered by disappointing fiscal stimulus measures from China, which led to significant declines in Chinese equities and rippled through global markets. Midweek, U.S. inflation data came in higher than expected, reinforcing concerns about the Federal Reserve’s monetary policy trajectory and waning investor sentiment. Additionally, a spike in U.S. jobless claims added to the uncertainty, suggesting potential headwinds for economic growth. However, the latter part of the week saw a slight recovery as major U.S. banks reported strong earnings, providing a boost to financial stocks. Meanwhile, geopolitical tensions in the Middle East and fluctuating oil prices added to market volatility. Overall, the interplay between economic data and corporate earnings shaped a week of cautious trading and heightened sensitivity to macroeconomic developments.

Highlights:

U.S. markets closed 1.13%¹ higher for the week despite disappointing Chinese stimulus measures, higher-than-expected inflation data, and a spike in jobless claims.
Canadian markets rose 1.33%² for the week, largely due to a rise in oil prices following an escalation of geopolitical tensions in the Middle East. The energy sector was the largest contributor to weekly returns.
European markets returned 0.35 %³ for the week, influenced by weaker U.S. labour market data, the Bank of England’s interest rate cut, and volatility in technology names following a sell-off in their U.S. counterparts.
Emerging markets closed 0.62%⁴ higher for the week following lacklustre stimulus measures from China. This led to a decline in investor sentiment and varied performance across regions.

Sovereign yields rise following U.S. inflation reading

Early in the week, U.S. Treasury yields continued their upward trajectory as markets priced in a resilient economic outlook, which could reignite inflationary pressures. Midweek, the release of higher-than-expected U.S. inflation data reinforced concerns about the Federal Reserve’s future rate cuts, causing bond prices to dip but not back into negative territory. Additionally, a spike in U.S. jobless claims added to the uncertainty, suggesting potential economic headwinds. However, the latter part of the week saw some stabilization as major U.S. banks reported strong earnings, which bolstered investor confidence in corporate bonds.

Highlights:

The 2- and 10-year U.S. Treasury yields were 25 basis points (bps) and 22 bps higher, respectively. In Canada, the 2- and 10-year yields were both 13 bps higher for the week.
Credit spreads remained firm amid limited primary supply, with investment grade issuers paying about 75 bps more and speculative grade borrowers facing an 85 bps increase compared to upcoming maturities.
Negotiations to end a monthlong strike at Boeing collapsed, prompting S&P to warn of a potential downgrade to speculative grade, as the strike has significantly impacted production and financial stability.

Weekly dashboard

Canada posts sixth straight monthly trade deficit

Canada recorded a bigger-than-expected trade deficit of $1.1 billion in August, its sixth consecutive monthly shortfall, as imports rose while exports declined, Statistics Canada (StatCan) reported. Analysts had forecast a $500-million deficit in the month. July’s trade balance was revised to a $287 million deficit from a surplus of $684 million initially reported. The trade report comes amid growing concerns of an economic slowdown in Canada. Data last month showed that the economy likely stalled in August and was on track to fall short of the Bank of Canada’s growth forecast for the third quarter.

Highlights:

Energy products were the biggest drag on exports in August, mainly due to cheaper crude oil, as concerns over oil demand weighed on prices.
Exports of forestry products and building and packaging materials also fell, weighed down by lower exports of pulp and paper to China and the U.S. The decrease in exports of pulp and paper may have been due to rail transport work stoppages in Canada in August, Statscan said.
Partially offsetting those declines, exports of motor vehicles and parts, and farm, fishing and intermediate food product categories rose in the month.

U.S. inflation drops, though some price pressures remain

The U.S. Labor Department reported consumer prices in the U.S. rose just 2.4% in September from a year earlier, down from 2.5% in August, and the smallest annual rise since February 2021. Measured from month to month, prices increased 0.2% from August to September. Excluding volatile food and energy costs, “core” prices, a gauge of underlying inflation, remained elevated in September, driven higher by rising costs for medical care, clothing, auto insurance and airline fares. Core prices in September were up 3.3% from a year earlier and 0.3% from August. Taken as a whole, the September figures show that inflation is steadily easing back to the Fed’s 2% target.

Highlights:

Apartment rental costs grew more slowly last month, a sign that housing inflation is finally cooling, a long-awaited development that would provide relief to many consumers.
Inflation last month was held down by a big drop in gas prices, which fell 4.1% from August to September. Grocery prices jumped 0.4% after roughly a year of mild increases, though they’re just 1.3% higher than a year earlier.
Restaurant food prices increased 0.3% and are up 3.9% in the past year. Clothing prices rose 1.1% from August to September and are up 1.8% from a year ago.

German factories fall further behind as orders sink

German manufacturing orders dropped more than expected in August, adding further pessimism to the struggling sector that offers little sign of a recovery. Orders fell 5.8% on month in August, according to data published by Germany’s statistics agency Destatis. That was weaker than economists’ expectations for a 2.0% drop and contrasts with an upwardly revised 3.9% increase in July orders. August’s decline was in part driven by large orders for transport equipment, including aircraft, ships, trains, and military vehicles, made in the previous month, Destatis said. Stripping out large-scale orders, which offers a better view of the underlying strength or weakness of the sector, orders declined a more modest 3.4% on month in August.

Highlights:

According to the data, new orders for capital and intermediate goods sectors were down 8.6% and 2.2%, respectively, on the month, and new orders for consumer goods declined by 0.9%, suggesting broad-based vulnerabilities.
The figures confirm that demand for German industrial goods has continued to weaken, suggesting the German economy could stagnate in the second half of 2024.
Momentum remains weak, heading into the latter stages of the year, with the mood among manufacturers turning more gloomy, according to the most recent purchasing managers’ survey data for September.

In the news: TD Bank reaches settlement with DoJ

The U.S. Department of Justice (DoJ) announced a historic settlement with TD Bank, which will pay US$3 billion in penalties for failing to prevent money laundering activities over several years. The settlement highlights significant lapses in the bank’s anti-money laundering controls, which allowed criminal networks to exploit its services. TD Bank has admitted to these failures and is taking steps to enhance its compliance programs to prevent future violations. The bank’s CEO emphasized their commitment to rectifying these issues and ensuring such lapses do not occur again. This case marks one of the largest penalties ever imposed on a financial institution for money laundering violations, reflecting the severity of the bank’s oversight failures. Additionally, the settlement will impose growth restrictions on TD Bank in the U.S. until it demonstrates substantial improvements in its anti-money laundering controls, potentially affecting its expansion plans and increasing operational costs in the short term.

Behind the headline:

The bank allowed over US$670 million to be laundered through its accounts between 2019 and 2023.
High-level executives were aware of the issues but failed to take corrective actions.
TD Bank will face a four-year oversight by the Financial Crimes Enforcement Network (FinCEN) as part of the settlement.

¹ S&P 500 Index CAD
² S&P/TSX Composite Index CAD
³ Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD
⁴ Bloomberg EM Large & Mid Cap Price Return Index CAD

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Thanksgiving long weekend

Week in review

Surge in volatility following mixed economic data, increasing geopolitical tensions

Sovereign yields rise following U.S. inflation reading

Weekly dashboard

Canada posts sixth straight monthly trade deficit

U.S. inflation drops, though some price pressures remain

German factories fall further behind as orders sink

In the news: TD Bank reaches settlement with DoJ

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