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.
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.
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.
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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