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Market Watch – May 25, 2018

May 25, 2018 | 1:34 PM

Big Picture By Bill Curry 

 Geopolitical Risks, Trade Tensions Impacting Markets  Equity markets ebbed and flowed this week in response to a variety of geopolitical events, including U.S. trade talks with China and what now appears to be a scuttled summit, and mounting tensions, between the U.S. and North Korea. On Monday the Dow surged nearly 300 points to its highest level in two months as concerns over a possible trade war between the U.S. and China eased. However, that optimism was tempered in light of ongoing tensions over the threat of U.S.-imposed steel tariffs, which have put America on a collision course with both Japan and Germany. Additionally, NAFTA talks reached a stalemate this week, as rhetoric between Canada, Mexico and the U.S. heated up after a key deadline was missed. U.S. President Trump has now threatened to impose tariffs of up to 25% on imported vehicles if a deal can’t be brokered. On Thursday markets swooned in response to news that Trump had cancelled a planned summit with North Korea, citing mounting hostility from Kim Jong Un. Turning away from geopolitics, U.S. markets rallied mid-week in response to the release of minutes from the Fed’s May meeting, which hinted that officials are taking a dovish stance toward inflation. Meanwhile, the U.S. benchmark for oil hit a three-and-a-half-year high this week as investors contemplated supply disruptions due to threatened economic sanctions for both Iran and Venezuela. Turning to Europe, business activity in the eurozone slowed for the fourth straight month in May, a sign that economic growth has yet to rebound from a surprisingly weak showing in Q1.  
 
Markets 

 An Up-and-Down Week U.S. equities traded slightly up, while the TSX surrendered a bit of ground. For the four days covered in this report, the Dow gained 97 points to close at 24,812, the S&P 500 added 15 points to end at 2,728 and the Nasdaq climbed 70 points to settle at 7,424. Closed for trading on Monday, the TSX dropped 49 points over the period to close at 16,114. 
 
 Equities/Strategy   

Investment Strategy: Strong fundamentals shine through noisy headlines Equities: Earlier this week, Scotiabank GBM equity strategists commented on implications of U.S. small-cap equities’ YTD outperformance relative to the S&P 500.  Through yesterday’s close, the Russell 2000 was up 6.5% on a total return basis, finishing just shy of Monday’s all-time high. The strategists believe the small cap equities rally implies two things. First, that risk appetite is far from dead, which could bode well for the broader S&P 500 (+2.8% YTD total return). Second, that momentum in small cap stocks could also carry large caps higher.  Even so, smaller cap stocks could remain in the lead for some time, benefiting from robust domestic economic activity, tax cuts, and a firmer U.S. dollar. The strategists remind investors that small cap stocks have increased balance sheet leverage at a faster clip than their large cap peers in recent years. In the context of rising costs of capital and a late-stage environment, small caps could continue to move up, but relative outperformance vis-à-vis large caps could eventually become harder to sustain. 
 
 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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