By Scotia Wealth Management - The Zukiwsky Group (Sponsored)

Market Watch – December 7, 2018

Dec 7, 2018 | 1:37 PM

Global Markets Volatile As U.S.-China Tensions Mount

Stock markets around world drifted lower on Thursday as the arrest of a top Chinese tech executive exacerbated fears over worsening U.S.-China trade relations, while oil prices declined further on concerns that OPEC’s expected production cuts might be less than expected. In the U.S., the Dow was down as much as 785 points before staging a late rally to pare losses down to just 78 points. The TSX was dragged down by a declining energy sector, dropping 246 points Thursday–after staging a broad-based, 119-point rally on Wednesday.

Although markets started the week on a high note – after the U.S. and China negotiated a 90-day trade truce at the G20 Summit – that optimism vanished Tuesday as the Dow plunged nearly 800 points on renewed fears about slowing global growth. The tech-heavy Nasdaq was also hit hard, surrendering 283 points.

Adding to investor fears has been the downward trajectory of U.S. Treasury yields. In late trading Thursday, the yield on the benchmark U.S. 10-year Treasury was at 2.89%, slipping from 2.92% late Tuesday. U.S. government bonds are teetering on the edge of a yield-curve inversion, where shorter-dated bonds yield more than longer-dated ones. That’s significant for many investors, who believe an inverted curve is a reliable predictor of a looming recession.

As expected, the Bank of Canada on Wednesday kept its key rate unchanged at 1.75% after five rate increases since mid-2017. BoC Governor Stephen Poloz highlighted a number of drags on the Canadian economy that could slow the pace of future rate hikes, including steep price drops in Canadian crude and persistent uncertainty over the U.S.-China trade showdown. In response to the BoC’s dovish sentiment, the Canadian dollar on Wednesday fell to an 18-month low versus the U.S. dollar. In late trading Thursday, the Canadian dollar was just below the 75-cent mark.

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N.A. Markets Drift Lower As Positive Sentiment Wanes

For the four days covered in this report, the Dow was off 590 points to close at 24,948, the S&P 500 declined 64 points to settle at 2,696, while the tech-heavy Nasdaq dropped 143 points to close at 7,188. (U.S. markets were closed Wednesday for a national day of mourning for President George H.W. Bush.) In Canada, the TSX was down 261 points to end at 14,937.

Equities

Our global economic outlook remains constructive. While global growth is expected to slow in 2019 and the balance of risks may skew to the downside, we believe investors will still be able to find attractive investment opportunities. We retain our geographic predisposition to the U.S. markets given our expectation for future positive earnings growth and continued strength in consumer spending levels. At the sector level, we would recommend reducing positions in cyclical sectors, such as automotive, semi-conductors, and commodity producers. Within fixed income, our tactical asset allocation model assigns a zero weight to high yield corporate debt given our preference for high quality, investment grade credit instruments.

(Big Picture – By Bill Curry)

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