Market Watch for July 13, 2018

Global Portfolio Advisory Group

July 16, 2018

Big Picture
By Bill Curry

U.S. Targets $200 Billion More in Chinese Goods

The Trump administration on Tuesday said it would assess 10% tariffs on an additional $200 billion in Chinese goods, further deepening the trade rift with China. In all, that would be tariffs on $450 billion of Chinese goods—nearly all the $505 billion that China exports to the U.S. Although the new tariffs won’t take effect for at least two months, Asian markets responded negatively to the news on Wednesday, dropping more than in 1% in Hong Kong, China and Japan.
In retaliation for U.S. tariffs, China on Thursday guided the yuan to its largest one-day drop against the U.S. dollar in 18 months (although the yuan rebounded later that day). The yuan has now declined 2.3% against the dollar in 2018. While China doesn’t import enough U.S. goods to respond dollar for dollar in tariffs, Beijing is looking for other ways to punish the U.S., including delaying licensing for U.S. firms and slowing mergers and acquisitions.
Thus far, the U.S. Federal Reserve has assumed that tariffs have not been big enough to impact inflation. However, reports suggest that the latest round of tariffs against China could boost the consumer price index by as much as 0.6%, which would add an equivalent amount to the annual inflation rate. Perhaps Congress is also getting a bit uneasy with President Trump’s trade war: the U.S. Senate on Wednesday voted overwhelmingly to give Congress say on tariffs imposed on the basis of national security concerns. Although the vote was non-binding, it’s a sign that Congress might be poised to rein in the U.S. administration.
In Brexit-related news, the resignations of two Brexit hardliners have thrown Theresa May’s government – and the entire Brexit process – into turmoil. Britain is currently due to leave the EU in less than nine months.

Markets

North American Markets Rebound: Investors put aside trade concerns as markets in the U.S. and Canada climbed higher after a mid-week selloff. For the four days covered in this report, the Dow gained 468 points to close at 24,925, the S&P 500 rose 38 points to end at 2,798 and the Nasdaq added 136 points to settle at 7,824. In Canada, the TSX added 195 points over the period to close at 16,567.

Equities/Strategy

On balance, we continue to recommend an overweight allocation to equities relative to fixed income: In a widely expected move, the U.S. imposed tariffs on US$34bn worth of Chinese imports on July 5th, and China responded immediately by introducing an equivalent 25% import tariff on US$34bn worth of American goods. Market reaction was muted. Subsequently, the U.S. announced plans to impose a 10% tariff on an incremental US$200bn of Chinese imports. The announcement, while consistent with earlier comments made by U.S. President Donald Trump, was met with a U.S. equity market sell-off on July 11th.  Investors’ focus now shifts to the Q2/2018 reporting season, which could serve to bolster sentiment and serve as an equity market catalyst. We are mindful of and intend to closely monitor the risks posed by a potential escalation of global trade tensions. At this point, trade and other risks appear manageable, and we believe the economic backdrop supports our long-standing relative preference for equities.

Please be advised that this material is not to be distributed to residents of the European Union.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.
TM Trademark of The Bank of Nova Scotia, used under license. Scotia Wealth ManagementTM consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. (SCI). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

Market Watch for July 6, 2018

Global Portfolio Advisory Group

July 6, 2018

Big Picture
By Bill Curry
Global Trade Slowing; Yuan Recovers After Drop
On Friday the Trump administration is scheduled to impose tariffs on $34 billion of Chinese imports. China has vowed to counter with corresponding tariffs on U.S. imports immediately after the U.S. tariffs take effect. On a positive note, shares of European carmakers climbed Thursday following a German press report that the U.S. proposed to stop threatening to impose tariffs on cars imported from the European Union if the EU lifts duties on U.S. car imports. German Chancellor Angela Merkel said Thursday Berlin was willing to cut import tariffs on cars as a way to end the Europe-U.S. trade standoff.
Meanwhile, there are signs that tariffs are impacting global trade. Global export growth for 2018 has slowed considerably – helping to drive sharp market declines in South Korea and Japan, which are heavily dependent on exports. Bank of England Governor Mark Carney warned Thursday about the risks to the global economy from a full-blown trade war, saying higher tariffs between the U.S. and its major trading partners could weigh on growth for years to come.
On Tuesday, China’s yuan fell to its weakest value against the U.S. dollar in nearly a year; however, the currency surged Wednesday after China’s central bank chief vowed to keep the exchange rate stable. A cheaper yuan effectively makes U.S. goods more expensive in China, and Chinese goods cheaper in the U.S., counteracting some of the impact of tariffs imposed by the U.S. administration.
Finally, the U.S. economic expansion entered its ninth year this week, with Q2 activity looking especially strong, driven by robust consumer spending. While Q2 numbers are solid, many analysts are looking ahead, trying to gauge the likelihood of recession, which could arrive in 2020. While a downturn is expected by most, it’s not a foregone conclusion, as Australia hasn’t had a recession since 1991, a stellar 27-year span.

Markets
U.S. Markets Edge Higher; TSX Off Slightly: Canadian markets were closed Monday for Canada Day, while U.S. markets were shuttered on Wednesday. For the four days covered in this report, the Dow gained 86 points to close at 24,357, the S&P 500 rose 19 points to end at 2,737 and the Nasdaq added 76 points to settle at 7,586. In Canada, the TSX declined 10 points over the period to close at 16,267.

Equities
Despite the maturity of the current economic cycle, we continue to recommend an overweight allocation to equities relative to fixed income. In our view, global earnings growth likely has peaked but is expected to remain strong over the coming quarters, buoyed by favourable economic conditions. Tempering our outlook is relatively high equity market volatility, partly a consequence, in our view, of escalating global trade tensions. On balance, we believe investors should take advantage of broad equity market pullbacks to add exposure to the asset class (where warranted), particularly given reasonable valuations. In the near term, we believe the U.S. equity market will continue to benefit from U.S. dollar strength and “flight-to-safety” tailwinds, given many international equity markets are relatively more sensitive to disruption in global trade activity.

Please be advised that this material is not to be distributed to residents of the European Union.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.
TM Trademark of The Bank of Nova Scotia, used under license. Scotia Wealth ManagementTM consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. (SCI). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.