By Scotia Wealth Management - The Zukiwsky Group (Sponsored)

Market Watch – Mar. 22, 2019

Mar 22, 2019 | 2:28 PM

Big Picture

Fed Holds Steady, No End in Sight to Trade War

The Federal Reserve held its benchmark interest rate steady Wednesday, with a majority of Fed officials signaling they might not hike rates at all this year. The central bank also said that it would slow the rate at which it is unwinding its $4 trillion balance sheet. Officials added that the Fed would end its balance sheet runoff in September, as long as the economy and money market conditions stay on track. Following the Fed’s announcement, bond yields and the greenback declined, with the yield on the 10- year U.S. Treasury dropping to 2.56%–its lowest level in more than a year. While markets initially responded positively to the central bank’s guidance, stocks declined in later trading Wednesday as fears of a cooling economy resurfaced. While markets don’t like rising rates, the Fed’s dovish stance, leaving the federal-funds rate at 2.25-2.5%, leaves them little firepower should the economy falter again. Wednesday was also a clear reminder that investors should brace themselves for more volatility. Stocks had earlier fallen in midday trading Wednesday after President Trump vowed to keep tariffs on Chinese imports in place for a “substantial period of time,” even after a potential trade deal was in place. Negotiators from both countries have scheduled a new round of trade talks starting next week. While Fed officials painted a fairly healthy picture of the U.S. economy, the bond market has soured on Canada’s economic outlook versus the U.S. This week the spread between yields on 10-year government bonds in the two countries had grown to its largest level in nearly three decades–roughly 88 basis points–as Canada’s near-term growth prospects dwindle. This week a 10- year Government of Canada bond was yielding just 1.7%, a steep decline from its October 2018 level of over 2.5%. Canadian policymakers have little leeway to raise rates given the cooling economy, weak oil prices and highly indebted consumers. Finally, the British pound has fallen this week as concerns mount over the very real possibility of a no-deal Brexit.

Markets

N.A. Markets Up After Fed Announcement

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For the four days covered in this report, the Dow added 113 points to close at 25,962, the S&P 500 climbed 33 points to settle at 2,855, while the tech-heavy Nasdaq rose 149 points to close at 7,838. In Canada, the TSX was up 105 points to end at 16,245. 

View a summary of key tax measures included in the 2019 Federal Government Budget Proposal that may impact you and your family here.

Equities/Strategy

Strategy

The European Central Bank (ECB) becomes the latest monetary authority to slow the pace of its policy tightening initiatives. The ECB’s Governing Council left its deposit facility interest rate unchanged at -0.4% last week, as was widely expected. The ECB also lowered its forward policy guidance to reflect a more challenging global economic backdrop. Importantly, ECB President Mario Draghi unveiled a third iteration of the central bank’s targeted longer-term refinancing operations (TLTRO III). TLTROs represent ECB cash loans to commercial banks, which in turn lend the funds to companies and consumers. The newest batch of TLTROs will be launched starting in September 2019, each with a maturity of two years. According to the ECB, these new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. The exact details of TLTRO III were not disclosed, affording the ECB flexibility in setting the scale of the program. Central banks globally have followed in the footsteps of the U.S. Federal Reserve (Fed) in reining in monetary policy tightening plans. The ECB now intends to keep its key policy interest rate unchanged for the duration of 2019 and, by renewing TLTROs for a third time, will maintain easy lending conditions through 2023. As a result of the first two rounds of TLTROs, European commercial banks owe ~€720 billion to the ECB, all of which comes due over the next two years. TLTRO III should ease this refinancing burden. Beyond this benefit, the operation’s effectiveness as a stimulus tool will depend on non-financial institutions being confident enough in the economic outlook to borrow and deploy capital. This remains to be seen, but on balance we believe last week’s ECB decision should benefit the European economy