Market Watch – June 29, 2018
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Big Picture By Bill Curry
Trade Woes Persist; Oil Prices Climb
It’s become an all-too-familiar refrain, but trade tensions continue to weigh on global markets. On Monday, U.S. and Canadian stocks suffered their worst one-day decline in several months – with tech stocks bearing the brunt of losses – amid reports that the U.S. administration planned to bar many Chinese companies from investing in U.S. tech firms. While markets recovered somewhat on Tuesday, downward pressure on shares continued mid-week, despite Trump’s later decision to back away from plans to restrict Chinese investment. Meanwhile, stocks in Europe have been battered by ongoing trade conflicts as investors have withdrawn billions of dollars from European equity and bond funds, worried trade frictions could derail an already fragile economic recovery in a region heavily dependent on international trade. While global markets remain on edge, the U.S. economy continues to roar, with one forecasting model tracking a 5.3% Q2 growth rate, which would be the fastest pace in almost 15 years. The strong Q2 growth is being fueled, in part, by a rebound in consumer spending. Oil prices reached their highest level in more than three years Wednesday, as threats to global supply loomed large – even as major oil exporters increased production. Prices have climbed over fears the amount of global crude could decline faster than expected, driven by harsh rhetoric from the U.S. on Iran sanctions and a drop in U.S. crude inventories. In Canada, odds of a July rate hike seemed more likely to many analysts after BoC Governor Stephen Poloz told reporters on Wednesday that he expects to continue raising interest rates in spite of mounting trade tensions, as inflation has already hit the central bank’s 2% target. However, much could depend on the U.S. response to Canada’s retaliatory tariffs, which are set to take effect July 1.
Markets
North American Markets Down
Through the Thursday close, trade tensions continue to weigh on North American markets. For the four days covered in this report, the Dow fell 365 points to close at 24,216, the S&P 500 dropped 39 points to end at 2,716 and the Nasdaq surrendered 189 points to settle at 7,504. In Canada, the TSX declined 271 points over the period to close at 16,179.
Equities/Strategy
Investment Strategy
On balance, we continue to recommend an overweight allocation to equities relative to fixed income, with major central banks recently confirming our optimistic view of current economic conditions. Meanwhile, trade and political risks highlight the importance of diversification and tactical duration management within fixed income portfolios. A hawkish Fed and a European Central Bank (ECB) approaching the end of its accommodative monetary policy era support our view that recession risks are low at the moment, warranting our equity overweight recommendation. However, manufacturing sector activity has shown signs of slowing down over the past few months. While mid-cycle pullbacks in purchasing managers’ index (PMI) breadth are common, a sustained decline could presage a recession. Meanwhile, escalating global trade tensions have dampened investors’ risk appetite and triggered bouts of heightened financial market volatility, evidenced by recent pressure on tradesensitive currencies such as the Canadian dollar, Mexican peso and Chinese yuan. In emerging markets (EM), trade uncertainty and a strengthening U.S. dollar are the primary reasons for widespread bearish sentiment, in our view. Mexico’s presidential election on July 1st is another significant near-term EM risk factor, particularly for Latin American economies.
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