Market Watch for January 12 2018

Global Portfolio Advisory Group

January 12, 2018

Big Picture

Data, central banks in focus

Economic data drove the narrative this week with a wide range of releases to digest here, south of the border and overseas. Staring in Canada, last Friday’s jobs report was unexpectedly strong taking the unemployment rate to a 40-year low of 5.7% in December from 5.9% in November. In related news, the Bank of Canada’s quarterly Business Outlook Survey released Monday shows companies are feeling the pressures of a tight labour market and strengthening economy. This has raised expectations that the BoC may raise borrowing costs at its January 17 policy-setting meeting. Also of note, Canada filed a complaint with the World Trade Organization Wednesday over American duties ahead of the sixth round of NAFTA talks scheduled for January 23 in Montreal. In the eurozone, the EU Commission found economic sentiment ending 2017 on a very positive note. At 116, the index was 1.4 points above November’s read and the best mark since October 2000. Also of note in the eurozone, jobs data released Tuesday showed the unemployment rate at 8.7%, the lowest since January 2009. Meantime, ECB minutes released Thursday from the bank’s December meeting show officials might move sooner than expected to further reduce stimulus efforts in light of the stronger-than-expected rebound in the eurozone economy last year. In China, consumer prices advanced 1.8% yoy in December, up from 1.7% over the year in November but still short of the 3.0% the country was targeting for 2017. Turning to the global economy, the World Bank said Wednesday that it expected growth to reach 3.1% this year after a faster-than-expected 2017. If 2018 projections are met it will be the first time since the financial crisis that the world economy is operating at full potential according to the bank. In geopolitical news, North and South Koreas opened the lines of communication this week with the North signing on for the Olympic Games and the South agreeing to military talks. Looking ahead, market watchers will be able to digest U.S. consumer price inflation and retail sales today with the former closely watched by the Federal Reserve for hints of rising prices.



U.S stocks extend record run

U.S. stocks padded all-time highs by the close of trade Thursday as investors grew more confident ahead of Q4 corporate earnings season south of the border. For the four days covered in this report, the Dow added 279 pts. to close at 25,574, the S&P 500 rose 24 pts. to close at 2,767 and the Nasdaq moved ahead 75 pts. to finish at 7,211. The TSX finished 63 pts. lower to end Thursday’s session at 16,286.



2018 gets off to a strong start as fundamentals remain solid

Strategy: Global markets have started 2018 in solid fashion with healthy YTD performances across equities, commodities and currencies. U.S. and Canada 10-year federal government bond yields are also on the march higher year-to-date.  These early gains can be attributed to, among other things, ongoing solid economic growth data and the recently approved U.S. tax cut package in late December, which boosts the corporate profit outlook, in our view. Market trends early in the year line up well with our 2018 investment strategy settings including overweighting equities relative to fixed income, preferring cyclical sector exposure (natural resources, industrials, financials) at the expense of interest-rate defensives (utilities, telecoms, consumer staples, real estate), and expecting the U.S. equity market to underperform its international and Canadian peers. We expect global market fundamentals to remain healthy throughout 2018. Notably, we believe global GDP growth is set to remain at 7-year highs as the recovery broadens out to all major economies, interest rates should rise moderately, and commodity prices should remain stable at supportive levels. In the near term, a number of event risks could inject markets with a usual dose of volatility. Those risks include a possible new raft of U.S. trade sanctions on China, a possible U.S. withdrawal from the Iran nuclear agreement, looming NAFTA negotiations that may not result in substantive progress, possible North Korean nuclear missile launches, etc.



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