Easy-money era drawing to a close
The holiday-shortened week was a busy one filled with extreme weather, central bank news and geopolitical drama. Starting overseas, the European Central Bank held rates steady at its policy-setting meeting Thursday but did say it has started to actively consider how quickly it will reduce its purchases of government bond purchases in 2018. The euro-zone economy has grown faster than expected this year and the bank cited growth as the key reason it wants to start tapering its bond-buying program which was initiated two-and-a-half years ago. Bank President Mario Draghi said the discussions were “very preliminary” and hinted that the ECB’s October 26 meeting was the most likely date to provide more details barring surprise developments. In Canada, the Bank of Canada forged ahead with a second interest rate increase this year taking the benchmark rate a quarter-percentage point higher to 1.0%. The bank said a surging economy forced its hand as Canada enjoys the strongest growth spurt in a decade and was tops among G7 countries in Q2 GDP growth. Traders are now anticipating two possible additional hikes over the next 12 months for Canada with the combined recent actions of the BoC, ECB and U.S. Federal Reserve heralding the end of easy money. Turning to geopolitical news, fresh threats from North Korea following last weekend’s nuclear bomb test sent the U.N. Security Council back to the drawing board to figure out what to do while President Trump said Thursday a military confrontation was still in the cards. In politics, a possible debt-ceiling shut down of the U.S. government has been postponed as President Trump surprised lawmakers with an agreement to roll together emergency relief for Houston with an extension to fund the government until December 8. Meantime, the second round of NAFTA negotiations got underway in Mexico last Friday and concluded Tuesday with the U.S. insisting its counterparts make concessions with the U.S. unwilling to do so. Finally, the economic costs stemming from extreme weather events are expected to ripple through the U.S. economy as Hurricane Irma heads for Florida and Houston residents begin the massive clean-up process. Looking ahead, Canada unveils jobs data today.
North American stocks fall
Most major North American stock benchmarks slipped through Thursday with the Dow falling 203 pts. to close at 21,784, the S&P 500 fell 11 pts. to end at 2,465 and the Nasdaq gave back 38 pts. to settle at 6,397. In Canada, the TSX shed 167 pts. to finish at 15,024.
Fundamentals remain solid; volatility rising on seasonal headwinds
Strategy: Markets have recovered from a recent bout of weakness but signs of hesitation and uncertainty remain. Risks surrounding geo-political events (North Korea nuclear weapons testing), domestic U.S. politics (widening Russia – White House probe, gridlock in Congress on health care and tax reform), natural disasters (Hurricanes Harvey and Irma), commodity price swings (oil falling/rising 10%), impending changes to monetary policy (Fed starting to shrink its balance sheet), etc. have resulted in markets trading in wider ranges over the late summer in thin trading conditions. These important event risks and the lack of a meaningful market correction of 7% or more for over a year-and-a-half while the S&P500 trades near recent all-time highs leaves the market susceptible to a pullback during the seasonally weaker September-October period. We would view a sizable pullback in markets as an opportunity to put any cash overweights to work given strong corporate fundamentals and low year-ahead recession risks. Canadian and international markets should continue to outperform the U.S. on USD weakness, broadening economic strength and cheaper valuations. From a sector standpoint, we prefer cyclicals to defensives, while credit is preferred over government bonds in fixed income.
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