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 Meanwhile, stocks in Europe have been battered by ongoing trade conflicts as investors have withdrawn billions of dollars from European equity and bond funds, worried trade frictions could derail an already fragile economic recovery in a region heavily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.
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.
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.
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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