Market Watch - September 7, 2018

By ScotiaWealth - The Zukiwsky Group (Sponsored)
September 7, 2018 - 11:27am

Bank of Canada Leaves Rates Unchanged, Tech Sector Tumbles 

The Bank of Canada on Wednesday held its benchmark interest rate steady at 1.5% as it signaled that the fate of NAFTA negotiations could affect the pace of future rate increases. In a brief policy statement, the central bank restated its view that higher rates will be necessary to keep inflation close to its 2% target, bolstering expectations the BoC will next hike the key interest rate by 25 basis points in late October.

Weakness in tech shares weighed on U.S. stocks for the second straight session Thursday, as concerns about regulation and trade continue to hang over the market’s star sector. What was unusual about the selloff was its breadth: hitting not just the social media giants - whose executives were on Capitol Hill to defend their efforts to combat election meddling - but also chip makers, software developers and online streaming services. U.S. government bond prices fell Wednesday in response to a report indicating the U.K. and Germany had abandoned key demands on Brexit—something that analysts suggested could potentially ease the way to a deal and diminish the safe-haven appeal of Treasuries.

Meanwhile, the U.S. trade deficit posted its biggest monthly increase in almost three and a half years in July, as a booming domestic economy raised imports while exports were restrained by trade conflicts and slowing global growth. One factor behind the July gap: U.S. exports of soybeans fell dramatically due to China’s retaliatory tariffs against the U.S. Finally, oil prices fell Wednesday – after spiking Tuesday – as tropical storm Gordon failed to develop into a major problem for U.S. Gulf Coast refineries

Markets

Tech Sector Weighs on Nasdaq, S&P

The U.S. tech sector dragged down the Nasdaq and S&P on Wednesday and Thursday, while lingering NAFTA worries weighed on the TSX. For the three days covered in this report, the Dow climbed 31 points to close at 25,996, the S&P 500 shed 24 points to end at 2,878 while the tech-heavy Nasdaq dropped 187 points to settle at 7,923. In Canada, the TSX declined 162 points to close at 16,101.

Equities/Strategy

Investment Strategy

We continue to recommend overweight exposure to equities and underweight exposure to fixed income, relative to our long-term strategic asset allocation model. In light of potential volatility at this late stage of the business cycle, we also stress the importance of portfolio diversification. U.S.-China and U.S.-Canada trade tensions have weighed on market sentiment in recent weeks. At the same time, a strengthening U.S. dollar (USD) has pressured commodities and emerging market assets. The USD has rallied more than 7% since early February of this year, and our technical analysis suggests further appreciation is possible. However, we would not be surprised to see short-term pullbacks in the greenback, consistent with investors periodically taking profits on long USD positions. As mentioned previously, financial market volatility could re-emerge, prompted by geopolitical, currency and credit risks, among others. Accordingly, we continue to recommend that investors actively manage their risk exposures, in part by diversifying their portfolios across traditional and alternative asset classes. 

(Big Picture -- Bill Curry)

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