By Andrew Trimble
BoC stands pat, ECB reduces stimulus
There was no shortage of big events this week with the calendar full of economic, earnings and political news. Starting in Canada, the central bank made no changes at its Wednesday policy-setting meeting keeping rates at 1.0%. The bank, which raised rates in July and September, is keeping its eye on the possible end of NAFTA and an economy which is decelerating after a strong, one-year run. Turning to Europe, the ECB announced plans Thursday to scale back stimulus efforts by reducing its monthly bond-buying program. The program is credited with helping the recovery across the 19-nation eurozone and may be extended beyond September 2018 which would represent the third extension. Also in Europe, the Spanish government was finalizing plans to remove secessionist leaders in Catalonia while the would-be breakaway region weighed plans to declare independence. In the U.S., it was a busy week for earnings as about 200 S&P 500 companies reported this week. Thus far, earnings reports have delivered mostly positive surprises with 73% of firms reporting beating expectations compared to a five-year average of 69% according to FactSet. Also in the U.S., lawmakers approved the fiscal 2018 budget which paves the way for a re-write of the tax system which is expected to be pro-business. In Asia, Japanese Prime Minister Abe won a strong mandate from voters in last weekend’s national election thanks in part to an economy that’s grown for the past 18 months. In China, the country concluded its twice-a-decade congress mid-week amending its charter to adopt a political ideology named after President Xi Jinping granting him authority on par with Mao and Deng. Looking ahead, the U.S. releases Q3 GDP data today while central banks in the U.S. and England meet next week.
Stocks end mixed
North American stocks see-sawed for the four days covered in this report on U.S. corporate earnings news. South of the border, the Dow added 72 pts. to close at 23,400, the S&P 500 gave back 15 pts. to finish at 2,560 and the Nasdaq shed 27 pts. to settle at 6,556. In Canada, the TSX was higher for the period rising 34 pts. through Thursday to end at 15,891.
Markets continue to impress following U.S. election
Equities : In addition to our overweight in Canada, Europe and Emerging Markets at the expense of the U.S., we are encouraged to see the Pacific region (Japan & Australia) finally joining the risk-on regime within equities. For Japan, we believe Japanese investors could be selling their foreign bonds in favour of domestic equities on the back of rising global yields and improving Japanese economic data. Australia, in our view, is benefitting from a stronger currency and firming commodity backdrop.
Third quarter earnings reporting is underway in the U.S. and early indications are for another robust season with 81% of companies reporting EPS surprises above consensus estimates thus far and 78% reporting a positive sales surprise. We continue to see evidence that global equities offer better relative value than fixed income investments and remain an under-owned asset class. As a point of reference, the S&P 500 earnings yield (earnings/price) currently sits 168bps above that of the yield on 10-year U.S. Treasury bonds, leaving equities at the cheap end of their post-1960 relative value range versus fixed income.
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