Big Picture By Bill Curry
Canada to Retaliate If Trump Targets Auto Imports
Canada will respond proportionally if the U.S. Administration makes good on threats to impose 25% tariffs on all imported vehicles and auto parts. That’s according to Canada’s deputy ambassador to the U.S., who spoke Thursday at a Commerce Department hearing in Washington. Such a move would up the ante in what has evolved into the most punishing trade war in recent memory between the U.S. and Canada. According to a study by the Center for Automotive Research, proposed U.S. tariffs would send vehicle prices soaring in the U.S., wiping out more than 700,000 jobs at U.S. car companies, parts makers and dealerships. Despite the multi-front trade war, the U.S. economy remains strong, boosted by healthy U.S. retail sales. U.S. markets climbed on Tuesday and Wednesday but declined Thursday as a round of lukewarm corporate earnings reports and renewed trade tensions weighed on sentiment. Major indexes briefly jumped Thursday after President Trump, during an interview on CNBC, said he hoped the Federal Reserve would stop raising rates. His comments depart from a convention in which presidents have refrained from commenting specifically on monetary policy. Meanwhile, China’s currency has now hit lows not seen since last July. The yuan has been hurt by a worsening trade conflict between the U.S. and China, and expectations that Beijing will ease monetary policy. In other currency news, the British pound fell to a 10-month low on Thursday and remains especially vulnerable should the U.K. leave the European Union without a trade deal. Finally, U.S. oil prices plunged over 4% on Monday, the latest indication that oil markets could be in for prolonged volatility as traders struggle with a range of supply issues.
U.S. Markets Flat; TSX Down Slightly
Trade concerns and some lacklustre earnings weighed on markets. For the four days covered in this report, the Dow gained 45 points to close at 25,064, the S&P 500 inched 4 points higher to end at 2,805 while the Nasdaq shed 1 point to settle at 7,825. In Canada, the TSX declined 16 points over the period to close at 16,543.
Global equity markets continue upward trend despite trade concerns. While global trade rhetoric continues to weigh on investor sentiment, the S&P500 index is a mere 2% away from its all-time high, and the S&P/TSX Composite Index –assisted recently by energy sector strength – reached a new all-time high last week. Q2/2018 U.S. earnings season has commenced with consensus forecasts implying YOY EPS growth of 20%, a healthy pace to be sure albeit slightly lower than last quarter’s 25% growth rate. In our view, earnings growth should persist provided global economic conditions remain favorable. Top-down Wall Street strategists expect a price return of approximately 5% for the S&P 500 Index through year-end, while equity analyst target prices imply a one-year price return for the index of ~10%. We reiterate our overweight to equities relative to bonds.
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