U.S. jobs data in focus
It was a relatively quiet week ahead of today’s U.S. employment data which is seen as key to whether the Federal Reserve will pull the trigger and raise interest rates this year. Strong job growth may be interpreted as a sign the central bank will move on rates while a weak report may stay their hand. Anything landing in the middle is sure to leave traders guessing in advance of the last two Fed meetings of the year in early November and mid-December. The presidential candidates are also closely watching the jobs data to see if it provides any leverage to their campaigns in advance of the November 8 vote. In related news, Thursday’s U.S. jobless claims for benefits fell last week to a 43-year low, an indication of strength that may foreshadow today’s employment data. Turning to Europe, a Purchasing Managers’ Index for the euro zone edged down to a 20-month low of 52.6 points in September from 52.9 the previous month. Of the four largest countries in the bloc, only France showed signs of momentum with Germany, Italy and Spain retreating (a PMI read above 50 suggests improvement while anything below indicates a decline). Elsewhere, Britain said it would invoke the exit mechanism used to leave the EU before the end of March. In Canada, GDP surged in July rising 0.5% adding to June’s 0.6% gain, the strongest two-month run in nearly five years. The strong July print puts GDP on track for a 3% annualized gain in Q3. Finally, China’s yuan joined the IMF’s basket of reserve currencies last Saturday marking a milestone for the government as an economic power. The yuan now joins the U.S. dollar, yen, British pound and the euro as currencies the bank may loan.
U.S. stocks lower
The first week of the final quarter of the year saw stocks drifting between gains and losses throughout the week. For the four days covered in this report the Dow shed 40 pts. to end at 18,268, the S&P 500 gave back 8 pts to settle at 2,160 and the Nasdaq was down 6 pts. to finish at 5,306. In Canada, the TSX was off 130 pts. through Thursday to close at 14,595.
We continue to favour banks, insurance, technology and energy. As the spectre of higher rates and Fed tightening increases, equity markets have historically experienced an increase in near term volatility. However, unless rising rates spur a recession, the bull market should resume as the onset of a recession is what ultimately ends a bull market. We advocate to use any future volatility (rate hike jitters, US elections, Deutsche Bank systemic risk fears, etc) to take down cash weights in favour of an equity overweight as we believe recession probabilities are low for at least 12 months. We advocate a weighting to sectors/regions that are generally contrarian and exhibit some of the following characteristics, trading at attractive valuations, geared towards improving economic growth and bottoming inflation expectations, and generally do well in late cycles. We will be specifically focusing on banks, insurance, technology, energy and non-US companies. We will be avoiding utilities, REITs and consumer stocks, especially in the US as valuations are expensive and these segments are over-owned.
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