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Trade and geopolitics overwhelm economic optimism

May 25, 2018

Global equities began the week on an optimistic note as tensions between the U.S. and China appeared to ease after Treasury Secretary Mnuchin said the risk of a trade war was “on hold”. That soon gave way to a host of concerns: President Donald Trump’s suggestion that a China deal “may be too hard to get done”, the President’s call for new tariffs on auto imports, his casting doubt on a new NAFTA deal by saying Canada and Mexico were “spoiled” and “very difficult to deal with”, the cancellation of his planned summit with North Korean leader Kim Jong Un, and the formation of an anti-euro government in Italy. The release of minutes from the Federal Reserve’s May 1-2 policy meeting lent some brief support to equities midweek. The minutes signalled that the Fed was in no rush to tighten any more aggressively than currently expected, and would welcome a modest overshoot of its inflation target. But as trade optimism faded, global government bond yields sank with equities, and safe havens including gold and yen climbed. 

Amidst the geopolitical turmoil, it was a sharp retreat in oil prices than weighed heaviest on Canada’s S&P/TSX Composite Index. West Texas Intermediate crude began the week pushing to fresh three-year highs after new U.S. sanctions on Venezuela prompted supply concerns. But prices pulled back after Russia and the Organization of Petroleum Exporting Countries said they were considering raising output to cool the market. TSX financials were also in the red as the big banks came under pressure after reporting earnings. Less than impressive earnings from some, and warnings of a cooling mortgage market at others, put pressure on most of the group, as did the pull back in interest rates. The recent trend of rising rates had been seen as a tailwind for bank profitability. Staples and industrials led the gainers.

Energy was also the biggest performance drain for the S&P 500, but the U.S. benchmark managed to end the week with a slight gain overall. The bond proxy sectors (utilities and real estate) led the gainers. These interest rate sensitive groups typically advance as rates decline. Ten-year U.S. treasury yields have dropped back below 3%, having pushed to a seven-year high of 3.12% late last week. The slide in interest rates didn’t halt the continuing strength in the U.S. dollar: the greenback climbed to its best level in six months against most other major currencies, with the notable exceptions of safe haven yen and Swiss francs. 

Major European and Asian stocks markets were all down, with Italy leading the way. The new Italian government’s views on government debt, fiscal discipline, and continuing participation in the common currency are troubling other euro-area governments, as well as investors. The uncertainties pressured equities throughout the region, but damage in the bond market was mostly limited to Italian bonds. Yields in Germany, France, and the United Kingdom all followed U.S. yields to lower levels this week (bond prices rise as yields decline). 

 

What’s ahead next week:

Canada

  • Bank of Canada interest rate decision
  • Current Account Balance (1st Quarter) 
  • Industrial Product and Raw Materials Price Indices (April)
  • Gross Domestic Product (March)
  • Markit Manufacturing PMI (May)

U.S.

  • Federal Reserve Beige Book release
  • S&P CoreLogic Case-Shiller National Home Price Index (March)
  • Conference Board Consumer Confidence (May)
  • BLS, ADP, and Challenger employment reports (May)
  • Retail and wholesale inventories (April)
  • Gross Domestic Product (1st Quarter)
  • Personal income and spending (April)
  • Pending home sales (April)
  • Construction spending (April)
  • ISM and Markit Manufacturing PMIs (May)

This weeks market closing values

EQUITY INDICES Level Change 1-week YTD 1-year 5-year
      CAD CAD CAD CAD
S&P/TSX 16,075.67 -86.64 -0.54% -0.82% +4.31% +4.88%
S&P 500 2,721.33 +8.36 +1.02% +5.45% +8.60% +15.68%
DJIA 24,753.09 +38 +0.87% +3.74% +13.15% +15.23%
FTSE 100 7,730.28 -48.51 -1.14% +2.58% +1.84% +5.15%
CAC 40 5,542.55 -71.96 -1.61% +4.84% +4.04% +9.69%
DAX 12,938.01 -139.71 -1.40% +0.65% +2.69% +12.04%
Nikkei 22,450.79 -479.57 -0.32% +5.11% +11.51% +12.24%
Hang Seng 30,588.04 -459.87 -0.73% +5.46% +14.22% +10.94%
CURRENCY RETURNS CAD Change 1-week Yth 1-year 5-year
US$ 1.2974 +0.0089 +0.69% +3.21% -3.79% +4.69%
Euro 1.513 -0.0038 -0.25% +0.27% +0.09% +2.54%
Yen 0.0119 +0.0002 +1.87% +6.21% -1.73% +3.07%
CANADIAN TREASURIES Yield Change COMMODITIES USD Change  
3-month 1.28 +0.02 Oil $67.56 -$3.72  
5-year 2.19 -0.11 Gold $1,300.97 +$8.37  
10-year 2.35 -0.14 Natural Gas $2.90 +$0.12