Market Watch - January 25, 2019

By Scotia Wealth Management - The Zukiwsky Group (Sponsored)
January 25, 2019 - 11:01am

 

BIG PICTURE

Markets Remain on Edge as Global Trade Concerns Linger

t’s been another choppy week, so far, for global equities, with many major indexes on track for weekly declines. On Tuesday the Dow, S&P 500 and Nasdaq suffered their steepest one-day declines since January 3, as persistent fears of stalling global growth have countered a better-than-expected corporate earnings season. Monday’s economic data out of China, showing the slowest annual growth in 28 years, have been followed by weakening numbers from Europe and Japan. Europe’s been hit by Britain’s chaotic exit from the EU, Italy’s ongoing fiscal troubles and falling industrial production from Germany in November, a sign of the far-reaching impact of China’s slowdown. Japan’s December exports had their largest year-over-year drop-off in more than two years as weakening demand from China sent Japan’s 2018 trade balance into deficit for the first time since 2015. With all eyes on China, the central bank on Wednesday injected over 250 billion yuan (~$38 billion) into the nation’s large and medium-sized banks in order to increase lending to small private businesses and stimulate the sputtering economy.

In Canada, the TSX lost ground on Tuesday, snapping a 12-day-long rally, with energy shares declining on the back of lower oil prices. Meanwhile the loonie weakened to its lowest level in more than two weeks on Thursday as optimism faded for a near-term resolution to a trade dispute between the U.S. and China. The two-week low comes after a string of weak domestic data this week prompted some economists to project a November contraction in Canada’s economy.

As expected, the European Central Bank (ECB) on Thursday kept its policy rate unchanged, clinging to its guidance for a rate hike after the summer, despite the sharp slowdown in economic growth. ECB President Mario Draghi, however, didn’t rule out new stimulus measures, warning that economic risks are mounting.

MARKETS

North American Markets Struggle for Traction

For the four days covered in this report, the Dow declined 153 points to close at 24,553, the S&P 500 dropped 29 points to settle at 2,642, while the tech-heavy Nasdaq fell 83 points to close at 7,073. In Canada, the TSX was off slightly for the period, shedding 23 points to end at 15,281.

EQUITIES/STRATEGY

Our outlook and the level of current rates indicate that short- to medium-term bonds offer an attractive source of income, lower expected volatility, as well as an opportunity to reinvest at more attractive yields in case of more-aggressive-than-expected central banks.

Our outlook for fixed income is based on the expectation of moderating global economic growth, which suggests that short-term rates are unlikely to rise materially from the current levels. As such, our view is that both the U.S. Federal Reserve (The Fed) and the Bank of Canada (BoC) are approaching their “neutral rate” targets. This is supported by our analysis which indicates that global economic growth may have already peaked for this cycle. While financial conditions have tightened, inflation remains benign and modest reacceleration of growth during second half of 2019 will likely cause central banks in Canada and the U.S. to increase policy rates once this year. At the same time, given our view that policy interest rates in Canada and the U.S. are close to neutral levels, longer-term fixed income presents an opportunity to extend duration and provide a portfolio buffer should the yield curve invert preceding a potential recession. We would favour a high quality stance with a preference for high quality investment grade, with minimal allocation to BBB-rated segment and no exposure to high yield. We continue to reiterate prudent portfolio diversification and place considerable premium on highly liquid issues, which we believe will be increasingly important given the maturity of the credit cycle.

 

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