Market Watch for August 4, 2017

Global Portfolio Advisory Group

August 4, 2017

Big Picture · Solid U.S., eurozone growth

Market watchers got a look under the hoods of the eurozone and U.S. economies over the past week with both releasing Q2 growth figures. Last Friday, the U.S. Commerce Department said GDP accelerated for the three months ending in June with the pace of growth reaching an annualized 2.6%, a rebound after a lacklustre start to the year of 1.2%. The improved growth coincides with stronger-than-anticipated U.S. corporate earnings which continued to impress this week. With nearly three-quarters of S&P 500 companies having reported earnings nearly 70% have beaten estimates with average, overall profits up 11% yoy. Eurozone growth figures released Monday showed the economy speeding up in Q2 by 0.6% or an annualized pace of 2.3%. That’s a slight improvement over Q1 and just shy of the rate registered in the U.S. Also in Europe, producer prices – the cost of goods leaving factories – fell 0.1% in June from May. Prices also fell in May and March pointing to continued weak inflation despite the pick-up in growth. In the U.K., the Bank of England held interest rates steady at 0.25% at its policy meeting Thursday saying Brexit is weighing on the economy. Returning to the U.S., a gauge of factory activity expanded for the 11th month in July suggesting steady growth heading into Q3. Meantime in China, its gauge of factory activity fell slightly more than anticipated to 51.4 in July from 51.7 in June. The dip suggests the Chinese economy may be slowing after a strong start to the year in which Q1 and Q2 annualized GDP growth rates came in at 6.9%. Looking ahead, both the U.S. and Canada release employment data today which will be carefully considered after both countries recently raised interest rates.

In central bank news, the U.S. Federal Reserve made no policy changes Wednesday but did say it would start unwinding its balance sheet “relatively soon”. In commodities news, Saudi Arabia, the world’s top oil exporter, said Monday it would further cut production and threatened to take action on others that aren’t keeping their promise to cut output. In political news, there was concern about policy direction from the White House following the failure to dismantle the Affordable Care Act and investigations into contacts with Russians before the November election. Turning to Europe, a Purchasing Managers Composite Index came in at 55.8 for July, lower than anticipated suggesting the economy grew slightly more slowly than analysts had expected. Also in Europe, U.K. GDP for Q2 came in at a lacklustre rate of 0.3%, a modest improvement from Q1 which posted a 0.2% growth rate. Looking ahead, we’ll see Q2 GDP figures today for both Canada and the U.S.

Markets · Stock benchmarks end mixed

North American stock benchmarks closed out the four-day period covered in this report with uneven results. In the U.S., the Dow cleared the 22,000 point level for the first time in history this week while adding 196 pts. to close at 22,026, the S&P 500 ended flat at 2,472 and Nasdaq gave back 34 pts. to finish at 6,340. In Canada, the TSX moved ahead 63 pts. through Thursday close to settle at 15,191.

Equities/Strategy · Market tone improves on strong economic data

Strategy: Global markets have rallied across most asset classes over the past couple of weeks including equities, government and corporate bonds as well as commodities while most currencies have gained against the U.S. dollar (including the CAD). The improvement in market tone has come on the back of positive economic data surprises globally, particularly amongst major economies such as China, Canada, the Eurozone and Emerging Markets. The broadening out of economic momentum beyond the U.S. into the rest of the world improves the resilience of the recovery cycle and has given investor confidence a shot in the arm in 2017. As a result, earnings prospects remain bright and confidence amongst central bankers to reduce current levels of monetary stimulus has firmed which has further bolstered the case for equity outperformance versus fixed income to continue over the coming year. Given our indicators suggest the next recession is not likely to materialize until 2019 at the earliest, we likely will retain our Overweight equity / Underweight bonds asset allocation strategy over the next 12 months. Given we are in the late stages of this economic cycle, which typically is characterized by strong economic growth, rising interest rates / bond yields and supportive commodity prices, a bias toward cyclical sectors (away from defensives) is maintained.


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