Fresh anxieties emerge
It was ‘risk on’ Monday morning as traders took comfort in an improving geopolitical outlook but North Korea’s latest missile launch revived anxieties before the week was out. The missile is the second to fly over Japan and the first since the UN endorsed fresh sanctions against the country. Market reaction was relatively muted in response to the latest provocation but it appears North Korea will loom in the background for some time. In economic news, the Bank of England made no changes to monetary policy at its regularly scheduled meeting Thursday. News of growing U.K. inflation released Tuesday may complicate things for the bank in the coming months however as the annual inflation rate hit 2.9% in August which is above the bank’s 2% target. That may test the bank’s patience to increase rates despite a lack lustre economy and Brexit uncertainty. Turning to the U.S., inflation data was also front and centre as a measure of consumer prices rose 0.4% in August from a month earlier, the biggest jump since January. The lack of inflation south of the border has confounded Federal Reverse policy makers throughout the economic recovery and the latest producer price index, a measure of rising prices impacting businesses, may add to the confusion as it rose a modest 0.2% in August. The Fed meets next Wednesday as does the Bank of Japan. Also in the U.S., weekly jobless claims fell last week but remained sharply higher than two weeks earlier due to Hurricane Harvey’s effects. Returning to Britain, Prime Minister May won a key vote on Brexit legislation designed to keep negotiations on track in advance of the country’s planned exit from the EU March 29, 2019. Looking ahead, market watchers can digest U.S. retail sales later today and the Trump administration plans to provide more details of its tax reform plan next week.
North American stocks jump
Stocks jumped to start the week lifting major U.S. benchmarks to record highs while the TSX closed at its highest point in nearly two weeks at the close of trade Thursday. For the four days covered in this report, the Dow added 406 pts. to end at 22,203, the S&P 500 moved ahead 34 pts. to finish at 2,495 and the Nasdaq rose 69 pts. to settle at 6,429. The TSX gained 187 pts. to end at 15,172.
Markets continue to impress following U.S. election
Equities: Recent work by the Scotiabank GBM equity strategist has commented on narrowing leadership within the S&P 500 and S&P/TSX indices. For the former, on a quarter-to-date basis through yesterday’s close (05 Sep/2017), the Information Technology (+7.0% total return) and Utilities (+5.8%) sectors have been standout performers. The other nine sectors have delivered a far narrower range of returns (-1.7% to +2.2%). A modest decline in long-term interest rates (which tend to benefit the Technology and Utilities sectors) may help to explain this performance divergence, but so too may be some moderation in returns following the strong performance of the S&P 500 in the 12 months ended 30 June/2017, during which the index delivered an 18% total return including performance of 10%+ for six of its eleven sectors. A similar story has unfolded in Canada where the QTD total return (C$ basis) is flat for the S&P/TSX overall, with only Materials (+7.3% – helped by a base metals rally) and Telecom (+1.5%) in the green. This followed a one-year return ended mid-2017 of 11%, including 10%+ total returns for five of the index’s eleven sectors.
We believe a near-term pause in equity markets is a healthy development and remain of the view a modest near-term pullback is a possibility. However, with GPAG strategy work suggesting the next U.S. recession will not start until early-2019, we expect equities to continue offering relatively better value than fixed income and would view sell-offs as buying opportunities. We continue to believe sectors sensitive to the economic cycle should outperform in this late stage of the current expansion.
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