Market Watch - Oct. 5, 2018

By ScotiaWealth - The Zukiwsky Group (Sponsored)
October 7, 2018 - 11:06am

U.S. Stocks Tumble as Bond Yields Hit Multi-Year Highs

U.S. stocks declined sharply on Thursday as U.S. Treasury yields rose to their highest level in more than seven years on robust economic data and positive comments from the Fed, sparking fears of mounting inflation. The Dow dropped for the first time in six sessions and was on pace for one of its biggest one-day drops in recent months.

The Nasdaq also fell nearly 2%, as many key names declined. Despite the pullback, U.S. stocks are still trading near record levels, raising concerns about inflated valuations with the earnings season right around the corner. Thursday’s rout was a stern reminder as to just how vulnerable the nine-year bull market is to interest-rate shocks. Much investor attention will be focused Friday on the U.S. Labor Department’s jobs report as strong data could send stocks and bond prices reeling again.

The CBOE Global Markets volatility index, known as Wall Street’s “fear gauge,” jumped 30% to its highest level since July, suggesting that investors might be bracing for more volatility. By late Thursday afternoon, the U.S. 10-year Treasury had settled just below 3.19%. The surge in Treasury yields has also prompted a rise in government bond yields across the globe.

In what now seems like a distant memory, Canada and the U.S. finally came to terms late Sunday night on a revised trade deal. The 24-year-old NAFTA agreement will be replaced by the USMCA – the U.S.-Mexico-Canada agreement. News of the trade deal sent the loonie surging above the 78-cent mark on Monday but declined later in the week, falling sharply in late Thursday trading, settling just above the 77-cent mark.


TSX Declines, Dow Up Despite Thursday Losses

For the four days covered in this report, the Dow climbed 169 points to close at 26,627, the S&P 500 shed 12 points to settle at 2,902, while the tech-heavy Nasdaq lost 166 points to close at 7,880. In Canada, the TSX declined 66 points to end at 16,007.



We continue to recommend overweight exposure to equities and underweight exposure to fixed income, relative to our long-term strategic asset allocation model. The United States-Mexico-Canada Agreement (USMCA), announced Sunday, helped reduce some of the near-term pressures facing the trade-dependent Canadian economy. Leaders from Canada, Mexico and the U.S. are expected to sign the new agreement before the end of November, at which point the agreement will be sent to the U.S. Congress for approval. The new agreement firmed investor expectations that the Bank of Canada (BoC) would raise interest rates as many as four times by the end of 2019, consistent with the strength of recent economic data releases. We share the same upbeat view of the Canadian economy but reiterate our bias toward the U.S. market in light of its more stable and diversified corporate earnings profile. Given the maturity of the current business cycle and the prospect of higher near or medium-term financial market volatility, we continue to recommend that investors manage risk through diversification across asset classes and geographic regions.


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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