Big Picture By Bill Curry
Loonie Suffering From G7 Summit Fallout Heated anti-Canada rhetoric from the Trump Administration following the G7 Summit has many Canadian business leaders concerned about the impact of the brewing trade war with the U.S. One victim of Trump’s tough talk has been the loonie, which edged lower against its U.S. counterpart on Thursday. In addition to U.S. tariffs and stalled NAFTA negotiations, the loonie has also been weighed down by Italy’s decision not to ratify the EU free-trade agreement with Canada, citing insufficient protection for Italy’s specialty foods. In other news, Canada’s household debt burden has hit a two-year low. The decline in the debt-to-income ratio was the biggest going back to 1990. However, overall household debt remains over $2 trillion, roughly equivalent to Canada’s gross domestic product. Turning to the U.S., the Trump administration is preparing to levy tariffs on tens of billions of dollars of Chinese goods. The move may come as soon as Friday and should spark heavy retaliation from Beijing. Speaking of tariffs, there’s no clear sign yet that ongoing trade tensions have negatively impacted the U.S. economy. On Wednesday, the U.S. Federal Reserve raised its policy rate 25 basis points to a range between 1.75% and 2%, while also signalling that interest rates will likely go up four times in 2018—instead of three, as had been widely predicted. Additionally, U.S. retail sales in May rose 0.8% from a month earlier – the biggest one-month jump since November, according to data released Thursday. Meanwhile, U.S. inflation continues to take shape, driven by higher energy prices and a tightening labour market. Finally, global markets were muted following President Trump’s historic summit with North Korea’s Kim Jong Un, with many analysts disappointed by the lack of specific details emerging from the Singapore summit.
TSX Up, U.S. Markets Mixed
The TSX registered gains, while U.S. markets were a mixed bag through the Thursday close. For the four days covered in this report, the Dow fell 141 points to close at 25,175, the S&P 500 climbed just 3 points to end at 2,782 and the Nasdaq gained 116 points to settle at 7,761. The TSX rose 126 points over the period to close at 16,329.
Investment Strategy: We continue to recommend an overweight allocation to equities relative to fixed income as near-term recession risks remain low. Global economic growth remains strong, and inflation is gradually picking up as labour markets continue to tighten. However, financial market volatility may creep higher as we approach the end of the business cycle. Accordingly, we continue to stress the importance of diversifying portfolios across multiple asset classes, including equities, fixed income and alternative investments. This week, the focus for investors was on the monetary policy decisions from the U.S. Federal Open Market Committee (FOMC) and the European Central Bank (ECB). The FOMC moved ahead and hiked its target interest rate range by 25bp and pointed to two more rate hikes for the rest of 2018, up from one previously. The ECB decided to leave its benchmark interest rate unchanged while further dialing back its Quantitative Easing (QE) program. The ECB’s will purchase €15bn bonds per month from October to December, down from the current purchase rate of €30bn/month (which will last until September). Potential market risks we intend to monitor as we head into the second half of the calendar year include political developments in Europe (Italy and Spain) and Latin America (Brazil and Mexico) and emerging markets’ rising debt levels.
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.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.
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