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Trade tensions still dominating sentiment

 

July 6, 2018

Trade disputes remained at the forefront of market concerns in this holiday-shortened week. Asian shares were hit particularly hard, as investors braced for the July 6 imposition of the first round of new tariffs – and countermeasures – between the United States and China. Canadian stocks fared much better, edging down slightly after the July 1 start of Canada’s retaliatory tariffs on U.S. goods, then finishing the week higher. Similarly, U.S. stocks held up well and finished higher after Friday’s strong employment report. In Europe, where the week began with a warning of significant European Union retaliation against threatened U.S. auto tariffs, shares jumped after reports both parties were attempting to resolve the dispute. 

The pressure on Canada’s S&P/TSX Composite Index was greatest in the trade-sensitive industrials sector, which is dominated by the railroad stocks, Canadian National and Canadian Pacific. As we approach second quarter earnings season, investors are also anxious about what impact will be seen in Canadian Pacific’s results due to a short-lived strike in May. The consumer staples sector, where the big players are under continuing pressure from the trend to online shopping, was also particularly weak. Strength in the information technology, telecom, and utilities sectors helped buoy the index. The technology sector gained as e-commerce platform company Shopify saw investor interest pickup, following a sharp selloff from its peak two weeks ago. The utilities sector moved higher after heavily-weighted Brookfield Infrastructure Partners agreed to buy some natural gas infrastructure from Enbridge. The all-important energy sector underperformed during a volatile week for the price of crude oil.

The S&P 500’s gain was led by the health care sector, which leapt Friday on promising news from an Alzheimer’s drug trial. Friday also saw technology shares advance with the return of positive sentiment. The interest rate-sensitive telecom services and utilities sectors were also strong. These groups, which tend to outperform as interest rates drop, climbed as U.S. treasury yields retreated due to the trade concerns. The threat of a global economic slowdown driven by protectionism has investors growing less certain of the anticipated pace of U.S. Federal Reserve rate hikes. However, domestic economic data this week, including the labour report and both manufacturing and services purchasing managers surveys, showed U.S. activity remains solid. As they were in Canada, trade-sensitive industrials were among the underperformers. So too were commodity metals dependant on international trade. The energy sector fell with declining crude prices. 

Most major European markets advanced, especially after reports of efforts to defuse the tariff threat to the auto sector. Unexpectedly strong German factory orders in May, and higher Euro area retail sales in June helped to life stocks, and were taken as signs that slow economic growth in the first quarter was likely temporary. Major Asian equity markets all fell leading up to Friday’s start of fresh trade restrictions. The MSCI Asia Pacific Index sunk to a nine-month low, while markets in Japan, Hong Kong, and Shanghai continued their sharp declines from highs reached in January.

 

What’s ahead next week:

Canada

  • Housing starts (June)
  • Building permits (May)
  • Teranet/National Bank Home Price Index (June)
  • Existing home sales (June)

U.S.

  • Consumer and Producer Price Indices (June)
  • Import and Export Price Indices (June)
  • Wholesale inventories and sales (May)
  • U. of Michigan Sentiment Index (July)

This weeks market closing values

EQUITY INDICES Level Change 1-week YTD 1-year 5-year
      CAD CAD CAD CAD
S&P/TSX 16,371.78 +94.05 +0.58% +1.00% +8.58% +6.17%
S&P 500 2,759.82 +41.45 +1.14% +7.90% +15.86% +15.91%
DJIA 24,456.48 +185.07 +0.38% +3.42% +16.05% +14.85%
FTSE 100 7,617.70 -19.23 -0.10% +1.59% +7.42% +5.62%
CAC 40 5,375.77 +52.24 +1.19% +3.35% +8.57% +10.15%
DAX 12,496.17 +190.17 +1.76% -1.20% +5.02% +12.63%
Nikkei 21,788.14 -516.37 -2.41% +1.96% +13.08% +11.48%
Hang Seng 28,315.62 -639.49 -2.61% -1.53% +11.96% +10.66%
CURRENCY RETURNS CAD Change 1-week Yth 1-year 5-year
US$ 1.3104 -0.0029 -0.22% +4.24% +0.97% +4.37%
Euro 1.5389 +0.0043 +0.28% +1.99% +3.82% +2.54%
Yen 0.0119 +0 +0.07% +6.36% +3.53% +2.57%
CANADIAN TREASURIES Yield Change COMMODITIES USD Change
3-month 1.21 -0.05 Oil $73.82 -$0.33
5-year 2.05 -0.02 Gold $1,254.98 +$1.82
10-year 2.13 -0.04 Natural Gas $2.86 -$0.11