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Market Watch – August 10, 2018

Aug 10, 2018 | 6:37 PM

Big Picture

By Bill Curry

S&P, Nasdaq Inch Toward Records; Canadian Markets Withstand Saudi Wrath

The S&P 500 and tech-heavy Nasdaq on Tuesday hit their second-highest close in history on the back of the high-flying technology sector, which has been at the nexus of a sharp recovery in U.S. stocks since a market swoon in February. Investor sentiment this week seems to have been buoyed by strong Q2 corporate earnings reports. With more than 85% of the companies in the S&P 500 having reported results, the firms have posted 24% growth in profits from a year earlier. Nevertheless, trade tensions between the U.S. and China continue to temper investor optimism. On Wednesday, Beijing warned that it would match the Trump administration step for step should it move ahead with new tariffs on Chinese imports. The Chinese economy faces strengthening headwinds from weakening consumption to slowed production and investment. The yuan has declined around 6% against the dollar in the past two months. In Canada, Saudi Arabia’s escalating efforts to make Canada pay for its criticisms of Saudi human rights have sent only a mild ripple through Canada’s markets, as the limited economic ties between the two nations are expected to limit the fallout from the diplomatic crisis. On Wednesday the Canadian dollar was briefly sent reeling by news reports that the Saudi government ordered its central bank and state pension funds to divest their Canadian stocks, bonds and cash holdings. The loonie, however, later bounced back to end the day up slightly against its U.S. counterpart. Why the Saudis have taken such a hard line against Canada’s criticism remains somewhat unclear. Turning to commodities, oil prices fell to their lowest level in nearly seven weeks Wednesday as total U.S. stockpiles of oil and fuel hit a seven-month high and U.S. – China trade tensions weighed on demand.

Markets

Nasdaq leads U.S. Markets, TSX Flat

Strong corporate earnings reports helped fuel optimism in U.S. markets, while the TSX was relatively flat in a shortened trading week. For the four days covered in this report, the Dow gained 46 points to close at 25,509, the S&P 500 climbed 14 points to end at 2,854 while the tech-heavy Nasdaq added 80 points to settle at 7,892. In Canada, the TSX dropped slightly, shedding 3 points over the period to close at 16,417.

Equities/Strategy

Strategy

We continue to recommend overweight exposure to equities and underweight exposure to fixed income, relative to our long-term strategic asset allocation model. Strong corporate earnings and low near-term recession risks support this view. Of the S&P 500 index constituents that have reported results for last quarter, over 80% beat EPS expectations. The U.S. corporate earnings growth outlook remains healthy and contributed to U.S. equity strength over the past four weeks, in our view. Within the fixed income realm, the slope of the U.S. yield curve (the difference between 10-year and 2-year U.S. Treasury yields) rose over the past two weeks and is currently hovering around the 30bps level. We believe increased inflation expectations, supported by strong economic data, pushed yields higher at the long end of the curve and explains the steepening. Meanwhile, financial market volatility, measured by the VIX index, has been on a downward trend and is currently near the lowest levels recorded since January of this year. With the U.S. Congress in recess and markets growing more immune to trade-tension headlines, near-term volatility should remain low, in our view. That said, we intend to diligently monitor economic and market conditions for signs that would warrant a shift in our tactical recommendations.

 

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