By Bill Curry
Investors Look to G7 Summit
All eyes will be on this weekend’s G7 Summit in Canada as investors look for signals as to whether the Trump Administration’s decision to impose steel and aluminum tariffs on its allies will develop into a bona fide trade war. While the Dow surged nearly 300 points Wednesday, worries over U.S. protectionism have weighed on investor sentiment and the outlook for global growth. Despite trade fears, the World Bank on Tuesday issued its forecast for the global economy estimating 3.1% growth this year, unchanged from its forecast in January.
In the U.S., the labour market continued its strong showing as data released Thursday indicated initial jobless claims dropped by 1,000 to a seasonally adjusted 222,000 last week. In fact, the U.S. had more job openings than unemployed Americans this spring. The Fed will be watching closely as worker shortages and stronger inflation could indicate an overheating economy, raising the need to hike interest rates more aggressively.
In Canada, forecasters are expecting Q2 growth of 2.5%–3%, largely in line with the most recent numbers from the BoC, which looks on track to raise interest rates again next month. However, the emerging trade conflict and the fate of NAFTA negotiations could alter those plans. Canada’s retaliatory tariffs against the U.S. are set to take effect July 1. Turning to Europe, the ECB’s chief economist on Wednesday indicated that the bank could soon begin winding down its €30 billion-a-month bond-buying program, despite concerns over tepid growth, an escalating trade conflict and Italy’s new populist government.
North American Markets Edge Higher
U.S. and Canadian markets drifted higher through the Thursday close. For the four days covered in this report, the Dow added 606 points to close at 25,241, the S&P 500 climbed 36 points to end at 2,770 and the Nasdaq gained 81 points to settle at 7,635. The TSX rose 149 points over the period to close at 16,192.
Equities: We recommend a cautious overweight to equities relative to fixed income, preferring companies with identifiable competitive advantages and that are likely to benefit from long-term growth themes. With the global quarterly earnings season nearly complete, the three major equity regions (Canada, the U.S., and international) we follow continue to deliver robust results. Although the breadth of earnings and revenue beats in North America is wider than it is internationally, international stocks are showing the strongest YoY growth due to base effects. In our view, international strength is not atypical late in the business cycle. We are mindful of the risk that rising commodity prices and wages pose to corporate profit margins and remain on the lookout for early signs of a business cycle downturn. In the interim, however, we retain our cautious preference for equities relative to fixed income.
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