Stormy weather

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%.

Tumultuous week globally roils markets

Markets began the week on an optimistic note as prospects of war between the U.S. and North Korea appeared to recede. Stocks advanced, volatility declined, and safe havens that rallied on last week’s fears – precious metals, treasuries, yen – all settled lower. But by mid-week, all heck broke loose.

As investors took in the terror attacks in Barcelona and the backlash to President Trump’s handling of the tragic events in Charlottesville, Virginia, stocks saw their second-biggest down day of the year, the yen pushed to a four-month high, and gold broke out to a nine-month high. Trump’s legislative agenda, including tax cuts and infrastructure spending, looked increasingly difficult, and U.S. and Canadian equities, as well as yields on government bonds, gave up the week’s early advances and more. Markets were especially unnerved by rumours that the President’s economic advisor Gary Cohn was resigning. Yields came under further pressure from Federal Reserve meeting minutes that showed central bankers less certain of the temporary nature of below-target inflation. Then Friday, most assets suddenly reversed course again when White House advisor Steve Bannon, a major advocate for Trump’s protectionist agenda, was reported to have left his position. After the rollercoaster, gold, yen, and treasuries ended the week close to where they started.

The S&P/TSX Composite dropped 0.5% for the week. Sector leadership lay with real estate, a so-called “bond-proxy” that gains as yields move lower. Unfortunately, the energy sector, which comprises more than 20% of the index by weight, was hit hard by sliding oil prices. West Texas Intermediate crude (WTI) fell almost 5% mid-week on fears that rising production would offset strong seasonal demand, then recovered Friday to finish the week down just 0.4%. Despite the weakness in oil, the Canadian dollar gained 0.8% versus the U.S. greenback when a modest uptick in core Canadian inflation data was seen as increasing the likelihood of another Bank of Canada interest rate hike this year.

Most U.S. economic data was reassuringly firm. Nonetheless, the week’s unsettling events drove the S&P 500 to a loss of 0.6%. As in Canada, strength in a bond proxy sector (utilities) was offset by weakness in energy names.

Most European and Asian equity markets saw solid gains as U.S.-North Korea tensions eased and managed to stay green through the rest of the week as economic data showed a broad-based recovery taking hold. Germany’s growth for the second quarter, although a touch below expectations, clocked in at its fasted annualized pace in three years. In the U.K., unemployment fell in July to its lowest level since the 1970s, while steady inflation gave the Bank of England room to wait on raising interest rates. Among major equity markets, only Japan lost ground. Japanese gross domestic product (GDP) was better than expected, but stocks retreated under continued pressure from the high level of the Yen versus the U.S. dollar.

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FALL 2017 Bahamas Hosted Networking Social Flyer

“Dear Leader” shakes markets out of summer doldrums

With second quarter earnings season winding down and little in the way of major new economic data, attention this week focused squarely on increasing tensions between North Korea and the United States. After the United Nations imposed its toughest sanctions yet against the North Korean regime, an exchange of bellicose threats between the “Hermit Kingdom” and the Trump administration jolted the CBOE Volatility index (VIX), a popular measure of equity market volatility often referred to as the fear index, to its highest level since Trump’s election. Virtually all major equity markets suffered losses. Most safe-haven assets such as gold, the Japanese Yen, and U.S. Treasuries moved higher, but the U.S. dollar, perhaps the most traditional safe haven, was pressured by soft inflation data.

Canadian equity markets were closed Monday for a civic holiday; but once open, they succumbed to the global risk-off environment. The benchmark S&P/TSX Composite slid 1.5%, led by information technology and health care where corporate news added to the market pressures. Energy names also experienced broad weakness. Crude oil prices fell as the International Energy Agency (IEA) cut its demand forecast, despite declines in U.S. stockpiles, a growing crisis in Venezuela, and OPEC moves to bring production in line with previously agreed targets. West Texas Intermediate (WTI) dropped 1.6%. As is often the case, the Canadian dollar fell alongside oil. The Loonie dropped a fifth of a cent to 78.8 cents U.S. after briefly peaking above 80 cents in late July. Precious metals names stood out on the upside as beneficiaries of safe haven flows. Spot silver and gold prices jumped 5.2% and 2.5% respectively. The yellow metal has now climbed 12.5% ($US) year-to-date.

Both the S&P 500 Composite and Dow Jones Industrial indexes set new all-time highs on Monday before rolling over. For the week, the S&P 500 gave up 1.4% led by resources and financials. The financial sector, while still outperforming the broad market year-to-date, is facing headwinds from lower inflation and bond yields. This week saw lower-than-expected readings for producer (PPI) and consumer prices (CPI) and unit labour costs. Aided by safe haven flows into sovereign bonds, the inflation data pushed U.S. 10-year Treasury yields down 7 basis points to 2.19%. Earnings reports continued to be responsible for top individual equity movers, both to the upside (e.g. Michael Kors Holdings, Perrigo) and the downside (Macy’s, Dentsply Sirona).

European stock markets were even weaker than North American ones, with Germany’s DAX down 2.3% and London’s FTSE 100 off 2.7%. European bank stocks, which had been rallying this year on talk of European Central Bank “tapering,” were hit hard by the drop in bond yields as North Korean tensions mounted. Major Asian markets rolled over with their western counterparts, but not before touching a new 10-year high (MSCI AC Asia Ex-Japan) early in the week. Hong Kong’s Hang Seng slipped 2.5% while Japan’s Nikkei 225, under additional pressure from the stronger Yen but closed on Friday for a holiday, dropped 1.1%.