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Still waiting for a NAFTA deal

August 31, 2018

Stocks in both Canada and the United States jumped, as the week began, on news that the U.S. and Mexico had reached a preliminary trade accord meant to replace the North American Free Trade Agreement (NAFTA). And while Canadian equities promptly took a step back and drifted lower while waiting for a potential U.S.-Canada deal, U.S. stocks pressed higher throughout the week, until dipping slightly on word of U.S. President Donald Trump’s plan to move ahead with further China tariffs. The S&P 500 and Nasdaq Composite indices both set new all-time highs.

Gains in Toronto’s S&P/TSX Composite Index were led by the health care, technology, and consumer discretionary sectors. Health care was lifted, once again, by strength in the cannabis companies. Share prices of auto parts makers – including Magna International Inc., Linamar Corporation, and Martinrea International Inc. – which together comprise over 20 percent of the discretionary sector’s index weight, surged on the expectations of a trade deal. The energy sector fell, even though oil prices climbed to two-month highs. Crude rose back above US$70/barrel after Iran warned it would choke international shipments through the Strait of Hormuz if it wasn’t allowed to use the strait for its own exports. Roughly 30 percent of all seaborne traded oil passes through this strategic waterway every year. Canadian energy stocks slumped after the Federal Court of Appeal quashed the approval of the Trans Mountain pipeline expansion. The materials sector lost ground due to weakness in gold producers. Interest rate-sensitive sectors, including utilities, telecom, staples, and real estate, lagged in anticipation of a rate hike from the Bank of Canada in October, a view supported by a solid second quarter Canadian GDP report this week.

U.S. second quarter GDP was also reported this week, with an upward revision confirming the recent acceleration in growth. July consumer spending also accelerated, and consumer confidence sits at a 17-year high. All this good news added fuel to this year’s equity rally that has been driven primarily by the boost to earnings from tax reform. Gains in the S&P 500 index, this week, were led by the technology and consumer discretionary sectors, where bellwethers Apple Inc. and Amazon jumped to new all-time highs after a major U.S. investment bank significantly raised its price targets for the companies. Interest rate-sensitive sectors (telecom, staples, and utilities) fell.

Major European markets were down. Investors were particularly concerned by reports that Italy’s budget deficit could exceed the limit set by the European Union, and that the government was hoping for a new bond purchase program from the European Central Bank. President Trump’s rejection of Europe’s auto tariff proposal, and his musing about withdrawing from the World Trade Organization, also weighed on equities. Stocks in Britain declined as fears grew of a disorderly Brexit. Major Asian markets were mostly up, as investors tried to weigh U.S.-China trade tensions against China’s actions to stimulate its economy.

What’s ahead next week:

Canada

  • Bank of Canada interest rate decision
  • Markit Manufacturing PMI (August)
  • Building permits (July)
  • Employment report (August)

U.S.

  • Markit Manufacturing and Services PMIs (August)
  • Construction spending (July)
  • ISM Manufacturing PMI (August)
  • Trade balance (July)
  • Employment reports (August)
  • Factory and durable goods orders (July)

This weeks market closing values

EQUITY INDICES Level Change 1-week YTD 1-year 5-year
      CAD CAD CAD CAD
S&P/TSX 16,262.88 – 93.17 – 0.57% + 0.33% + 6.91% + 5.15%
S&P 500 2,901.52 + 26.83 + 1.24% + 13.14% + 22.40% + 17.12%
DJIA 25,964.82 + 174.47 + 0.99% + 9.51% + 23.34% + 16.81%
FTSE 100 7,432.42 – 145.07 – 0.79% – 3.42% + 4.81% + 3.78%
CAC 40 5,406.85 – 25.65 – 0.42% + 2.34% + 8.18% + 8.41%
DAX 12,364.06 – 30.46 – 0.19% – 3.76% + 4.35% + 10.70%
Nikkei 22,865.15 + 263.38 + 1.59% + 6.13% + 20.33% + 13.37%
Hang Seng 27,888.55 + 216.68 + 1.10% – 3.28% + 3.65% + 9.48%
CURRENCY RETURNS CAD Change 1-week Yth 1-year 5-year
US$ 1.3050 + 0.0024 + 0.18% + 3.81% + 4.55% + 4.37%
Euro 1.5145 + 0.0008 + 0.05% + 0.38% + 1.89% + 1.68%
Yen 0.0117 + 0.0000 + 0.32% + 5.28% + 3.48% + 1.82%
CANADIAN TREASURIES Yield Change COMMODITIES USD Change
3-month 1.52 0.00 Oil $69.93 + $1.21
5-year 2.17 – 0.04 Gold $1,199.61 – $6.29
10-year 2.23 – 0.03 Natural Gas $2.96 – $0.03