Trump to meet Kim
There was no shortage of market-moving events to digest this week including geopolitical developments, trade tariffs and three monetary policy meetings. In Washington, U.S. President Trump agreed to meet with North Korean leader Kim Jong Un which may mark a turning point in relations after more than 60 years of confrontation. Also in Washington, Trump temporarily spared Canada and Mexico from metals tariffs Thursday but if an agreement on NAFTA can’t be reached he says he may rescind the exemption. In Canada, the BoC met mid-week leaving interest rates unchanged at 1.25%. The decision to stand pat stemmed from growing trade protectionism concerns from the U.S. which are clouding global and Canadian economic outlooks. Turning to Europe, the ECB made no changes to monetary policy Thursday but did drop its pledge to accelerate monthly bond buying if the economy takes a turn for the worse. The move sets the central bank on a new course to phase out its ultra-loose stimulus program that’s helped reinvigorate the 19-member single-currency zone. Also on the central bank front, the BoJ stayed the course at its Thursday meeting while Japanese Q4 GDP was revised up confirming the longest run of growth in 28 years. On the political front, Italians went to the polls last Sunday with populist parties winning the majority of the vote but it’s unclear whether they can work together to form a Parliamentary majority. Looking ahead, Canada and the U.S. report on employment situations today with the American print particularly important as market participants look for signs that may force the Fed to quicken the pace of interest rate hikes.
North American stock benchmarks climbed for the four days covered in this report. The Dow added 257 pts. to close at 24,895, the S&P 500 added 47 pts. to finish at 2,738 and the Nasdaq moved ahead 170 pts. to settle at 7,427. The TSX also had a winning week rising 154 pts. to end Thursday’s session at 15,538.
Fundamentals remain supportive notwithstanding noisier headlines
Market Strategy: Recent weeks have featured elevated market volatility across equities, fixed income, commodities and currencies. This phenomenon erupted abruptly in very late-January following an extended period over late-2017/early-2018 of accelerated gains devoid of any material pullbacks, which left market positioning unbalanced. Having entered into the late stages of the business cycle (the length of the U.S. recovery, assuming it continues, will reach the ten year mark in July 2019, tied for the longest on record in the post-WWII period), it is quite normal that the maturation of the market cycle should be characterized by an elevated range of volatility amid rising interest rates and a flattening yield curve. Markets will also have to continue to contend with increased global trade anxiety as new U.S. tariffs on steel and aluminum imports of 25% and 10%, respectively, strain relationships with other countries (Canada and Mexico are exempted – for now) and present a new source of market risk. However, while these factors could be transient headwinds, we expect global market fundamentals to remain supportive over the remainder of 2018. These fundamentals include global economic growth levelling off at an above-trend pace, central bank policy tightening on a gradual path, commodity prices remaining in current ranges, and sustained double-digit earnings growth. As a result, we maintain our asset allocation strategy of overweighting equities over bonds with an eye to deploying excess cash on meaningful equity market pullbacks (such as the recent 10% correction in early February).
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