Big Picture · Sabre rattling spooks markets
Geopolitical tensions came to the fore this week as the U.S. and North Korea ratcheted up their war rhetoric and fears grew over a nuclear-armed confrontation. Until now, the sabre rattling between the two countries had been taken in stride by global equity markets but stocks reacted to the most recent threats by falling around the world Wednesday and Thursday. In other news, Chinese import and export data came in weaker than expected in July but despite the deceleration the rates of growth were still healthy. Exports in July grew 7.2% from a year earlier, down from an 11.3% gain in June while imports expanded 11.0% last month from a year earlier, slower than June’s 17.2% rise. In Canada, consumer confidence hit a multi-year high last week and very near an all-time high thanks to a rising loonie and a hot labour market. With respect to the labour market, jobs numbers came in better than expected on both sides of our border last Friday. In the U.S., job growth was recorded for the 82nd straight month in July while the unemployment rate reached 4.3%, a 16-year low. Meantime, the Canadian unemployment rate fell to a nearly 9-month low of 6.3% last month as the economy added jobs for the 8th consecutive month. Looking ahead, market watchers get a look at U.S. consumer prices today which, if subdued, may complicate decision-making regarding the next, anticipated interest rate rise by the Federal Reserve. Inflation is one of two key measures – the employment situation is the other – the Fed relies on to guide its actions.
Markets · North American stocks slip
Solid corporate earnings and an improving global economic picture were not enough to support U.S. equity benchmarks through Thursday amid the escalating war of words between the U.S. and North Korea. For the four days covered in this report, the Dow fell 248 pts. to close at 21,844, the S&P 500 gave back 38 pts. to end at 2,438 and the Nasdaq lost 135 pts. to finish at 6,216. In Canada, the TSX also closed lower falling 183 pts. to settle at 15,074.
Equities/Strategy · Strong fundamentals offer support for equities
Equities: Strong U.S. Q2 results (10% YOY earnings growth, 74% of companies beating analyst estimates with an average 6.0% surprise) coupled with strong YOY earnings growth around the world are supportive of global equities, in our view. We believe equities are still under-owned and offer relatively better value than fixed income. We would view potential small near-term pullbacks, such as those witnessed this week, as possible buying opportunities provided recent geopolitical tensions abate.
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