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Market Watch – Feb. 22, 2019

Feb 22, 2019 | 11:02 AM

 

Big Picture

Markets

Looking Past Negative Trade Data for Now

Markets continue to cling to hopes for a 2019 rally that’s been fueled largely by optimism over U.S.-China trade negotiations and a more patient stance from the Fed. On Wednesday, global stocks started higher with an Asian rally that pushed the MSCI World Index to its highest since October after President Trump cited progress in ongoing trade talks. However, the latest economic data will be hard for investors to ignore. Japan and eurozone manufacturing sectors are pulling back, with preliminary February data showing factory activity in Japan at a 32-month low and the eurozone at a 68-month low. South Korean trade figures released Thursday show exports and imports fell sharply – the most since mid-2016, with exports to China tumbling 13.6%. Korea’s weakness is significant, given its position at the center of many international supply chains. In North America, U.S. markets closed lower Thursday following a Commerce Department report indicating weaker-than expected durable goods orders, declining home sales and a surprise drop-off in new orders for key U.S.-made capital goods. On Bay Street, the TSX also finished lower as gold prices slid and crude prices pulled back from recent highs. On Wednesday, crude prices had risen to 2019 highs helped by supply cuts from top producers, as well as U.S. sanctions on Iran and Venezuela. Finally, despite a fairly strong showing for the loonie so far in 2019, some analysts are predicting a slide down to the 71-cent mark over the next five years. It’s suggested a weaker loonie is needed to boost Canada’s export economy and take pressure off consumer spending and housing, which has largely shouldered the burden for recent economic growth.

Markets

TSX Lifted by Energy and Materials; U.S. Markets Slightly Down

For the three days covered in this report (markets were closed Monday), the Dow shed 33 points to close at 25,850, the S&P 500 lost 1 point to settle at 2,775, while the tech-heavy Nasdaq dropped 12 points to close at 7,460. In Canada, the TSX, buoyed by rising energy and gold prices, climbed 163 points to end at 16,001.

Equities/Strategy

Equities

North American equity markets extend January’s bull run. Since the beginning of 2019, major North American equity indices have rallied ~11%-15% as global central banks signalled a pause in policy rate hikes and data dependent paths forward. Positive economic data also contributed to equity market performance. Robust GDP growth, persistent labour market tightness and steady inflation have underpinned a renewed sense of optimism within financial markets. Risks to the market include U.S.-China trade relations (the 90-day tariff-increase truce period ends March 1st), Brexit (still slated for March 29th), and the U.S. debt ceiling (which will need to be increased in March). Nonetheless, provided this uncertainty abates and the economic data remains healthy, equity markets should remain well-supported until central banks deem further policy adjustments are warranted.

~90% of S&P 500 Index constituents have reported 4Q2018 results so far. While companies reporting earnings per share (EPS) that exceed consensus estimates is nothing new, the magnitude of such “beats” is on pace to register its lowest reading since 4Q2015. Additionally, companies have generally provided weaker-than-expected 1Q2019 financial guidance. Over the balance of 2019, we expect rising input and labour costs may force companies to pass along price increases to consumers, resulting in lower sales volumes that may eventually choke off corporate earnings growth. Owing to the YTD equity market rally, price-toearnings multiples across most global equity markets have rebounded from their late-2018 lows, although all remain below their five-year averages.