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Market Watch – May 18, 2018

May 18, 2018 | 1:59 PM

Big Picture By Bill Curry 

 Crude Reality: Supply Concerns Driving Prices Higher Brent crude broke past $80 a barrel Thursday, as U.S. President Donald Trump’s decision to reinstate sanctions on Iran continued to fuel a rally that has pushed prices to three-and-a-half-year highs. Rising commodity prices are also contributing to higher inflation expectations, which are putting additional pressure on the bond market. Yields on the 10-year Treasury rose Thursday to 3.12%, the highest mark since 2011. In other news, U.S. retail sales data released Tuesday shows U.S. consumers boosted retail spending by 0.3% in April. The latest reports helped ease concerns that momentum is waning for the second-longest economic expansion in U.S. history. Turning to trade news, rewriting NAFTA this year is starting to look increasingly unlikely. U.S. House Speaker Paul Ryan had set a Thursday deadline, albeit informal, to get a deal through Congress this year— before U.S. mid-term elections alter the political landscape. President Trump has repeatedly threatened to withdraw from NAFTA if there’s not a new and improved deal. Turning to Canada, analysts are voicing concerns that rising U.S. interest rates are pushing up term interest rates in Canada—more than policymakers would like to see. The BoC has vowed to proceed cautiously about the timing of its next rate hike, given the roughly $2trillion of debt Canadian households are carrying. In Europe, political uncertainty in Italy put pressure this week on the country’s stocks and bonds, following initial media reports of a draft government program that proposed new procedures to allow countries to quit the euro. The draft also noted that Italy would ask the ECB to write off €250 billion of government debt. Stock prices recovered a bit in early trading Thursday after Italy’s new government said that leaving the common currency was no longer a topic for discussion.  
 
Markets 
 U.S. Equities Off Slightly, TSX Higher  U.S. equities traded slightly down, while the TSX, buoyed by rising oil prices, headed higher. For the four days covered in this report, the Dow lost 117 points to close at 24,714, the S&P 500 shed 8 points to end at 2,720 and the Nasdaq dropped 20 points to settle at 7,382. Lifted by a strengthening energy sector, the TSX added 160 points to finish at 16,144. 
 
Equities/Strategy   Investment Strategy: Strong fundamentals shine through noisy headlines Strategy: Significant developments across global economic, political and market trends have accelerated in recent weeks with important implications for investors across asset classes. On the economic front, growth indicators have cooled from last year’s red-hot state but remain at a still-healthy, above-trend pace (such as the U.S. unemployment rate falling below 4%). Inflation has continued to creep higher in most major economies, lifting short and long-term interest rates over the past month. The political landscape remains fluid with the U.S. announcing its withdrawal from the Iran nuclear agreement, U.S.-China trade talks continuing with some signs of detente, NAFTA negotiations continuing past a May 17th deadline set by the U.S. Congress, and North Korea threatening to cancel a June 12th summit with the U.S. Equity markets have rebounded recently (the S&P/TSX index is rallying toward late-January highs), WTI crude oil has climbed above US$70/barrel for first time since late-2014, and some emerging markets (notably Argentina and Turkey) have come under significant pressure over the past month. Our medium-term focus on favourable fundamentals (solid economic momentum and earnings growth complemented by supportive fiscal and monetary policy) leaves our tactical asset allocation strategy overweight equities versus fixed income with a bias toward increasing exposure to lower-correlated assets as a buffer against elevated volatility. 
 

This material does not include or constitute an investment recommendation, and is not intended to take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and talk to your investment advisor. 
 
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