With a fairly quiet economic calendar, markets were expected to focus on speeches from Federal Reserve Chair Yellen and European Central Bank President Draghi for clues about plans for removing monetary policy stimulus. Instead, President Trump’s remarks at an Arizona rally rattled investors by thrusting trade and the looming government debt ceiling debate to center stage, and helped push the DXY U.S. dollar index to two-and-a-half-year lows. Meanwhile, storms of the physical rather than political type, also surprised markets. In Hong Kong, Typhoon Hato, one of the most powerful storms on record, forced a mid-week shutdown of securities markets, and in the Gulf of Mexico Hurricane Harvey took aim at the Texas coast and threatened to damage refineries there, which would weaken demand for crude oil.
Despite the pressure on crude prices – West Texas Intermediate (WTI) fell 1.4% due to Harvey and other concerns – and the renewed rhetoric about terminating NAFTA, stocks in Canada were broadly higher and the loonie moved back above 80 cents U.S. The financials sector, which comprises a third of the S&P/TSX by weight, advanced on strong bank earnings, helping the index to a gain of 0.7%. The materials sector, industrial metals in particular, had another strong week as global economic activity continued to improve. The Organization for Economic Cooperation and Development (OECD) reported that for the first time in a decade, all 45 countries it tracked were expected to grow this year.
The S&P 500 made broad gains early in the week following better purchasing managers index data (PMI) and reports the Trump administration was making progress in its tax reform efforts. But equities settled back somewhat after the President signaled a willingness to allow a government shutdown over border wall funding. Weaker than expected home sales and heightened unease about global trade added to investors’ worries. The growing economic and political concerns pressed 10-year Treasury yields to eight-week lows. The S&P held onto a gain of 0.7%, with leading sector strength coming from ‘bond proxies’ real estate and telecom services, which tend to gain as interest rates decline. Weighing most on both U.S. and Canadian markets were grocers and other consumer staples retailers, whose shares tumbled after Amazon announced plans to slash prices at recently acquired Whole Foods.
Major European stock markets were mostly higher as manufacturing PMI data topped expectations for the Eurozone as a whole, and for Germany and France in particular. Among more worrying notes, the services PMI unexpectedly declined, the ZEW German economic sentiment indicator dropped sharply, business confidence in the U.K. continued to fall ahead of Brexit, and Draghi’s comments at Jackson Hole failed to halt the Euro’s gains versus the U.S. dollar, which act as a headwind for European stocks.
Asian markets were mixed with earnings optimism and commodity strength countered by nervousness related to war drills on the Korean peninsula and growing trade tensions (late last Friday the U.S. fired the first shot in a trade war with China, launching an official investigation into China’s theft of intellectual property). Japan’s Nikkei slipped 0.1% and Hong Kong’s Hang Seng climbed 3%.