Central bankers in the news
It was central banker week with news from the Banks of Japan, England and the U.S. Federal Reserve. Starting in the U.S., the Fed raised interest rates by a quarter percentage point as expected and expressed its plan to raise once more before the year is out assuming the economy evolves as anticipated. Fed officials also said they would start to shrink the bank’s US$4.5 trillion dollar portfolio of bonds and other assets the bank has accumulated since the 2008 financial crisis. The moves are the latest test to see if the U.S. economy can stand on its own without the help of massive stimulus. Turning to the U.K., the Bank of England met Thursday but made no changes to interest rates leaving them unchanged at 0.25% citing political and economic uncertainty surrounding Brexit. Notably, the policy-making committee came to its closest vote to raise rates since 2007 as it appears bank officials are becoming increasingly concerned about inflation. In Japan, the BoJ also stood pat on rates leaving them unchanged in light of modest economic improvements. The bank employs such measures as negative short-term interest rates and massive purchases of government bonds to keep long-term rates near zero per cent to encourage banks to lend more. In economic news, Chinese yoy retail sales and industrial production numbers for May were virtually unchanged pointing to continued stability in the world’s second largest economy. Looking ahead, market watchers will get reads on Canadian retail sales and inflation next week.
U.S. stocks end mixed
U.S. stock benchmarks were mixed this week through to the close Thursday while the TSX was dragged lower by falling crude prices, which hit seven-month lows. For the four days covered in this report, the Dow added 88 pts. to close at 21,359, the S&P 500 gained 1 pt. to end at 2,432 and the Nasdaq gave back 42 pts. to finish at 6,165. The TSX fell 313 pts. to settle at 15,160.
Evaluating opportunities abroad
Equities: Well-known sell side firms have singled out the best performing areas such as large cap technology for being over-bought, docile and overly-loved. This rotation call dovetails with our bias towards Banks and Defensive Energy for second half leadership as opposed to technology (despite technology fundamentals remaining strong). Our leaning towards Defensive Energy centers on shale plays that can still thrive in a low oil environment as well as pipelines/large-cap integrateds and select refiners.
We continue to believe European equities will close its valuation gap as previous headwinds (inflation, negative banking sentiment, political risks, Euro break-up fears) switch over to tailwinds (GDP, PMI, improving business/consumer confidence, benign USD). In addition to Europe, we see opportunities in Asia-Pacific markets (Japan, Australia, ASEAN, Korea and China).