Fed says policy path not deflected by hurricanes

The U.S. Federal Reserve policy statement this week drove most market movements – with the U.S. dollar, global bond yields, and equities all advancing – while precious metals and non-USD safe haven currencies were broadly lower. Once again all three major U.S. equity indices touched new highs, as did the MSCI World index. Gold retreated back below $1,300 USD/ounce, putting an end to its recent breakout to 12-month highs. The loonie also gave back some of its recent gains – in part due to U.S. dollar strength, but also in response to Bank of Canada Deputy Governor Timothy Lane saying the bank is “paying close attention” to the stronger dollar in its consideration of interest rate policy.

As expected, the Fed announced it will begin unwinding its $4.5 trillion balance sheet in October, by not reinvesting some of its bonds as they mature. It also reaffirmed its stance that low inflation was transitory, and said hurricane disruptions would not deflect it from its path to interest rate normalization. Better than expected economic data, including signs that Hurricane Harvey had less of a macro impact than feared, reinforced the case for policy tightening. Investors reacted with heightened expectations of a December rate hike.

In Canada, the heavily weighted financials and energy sectors boosted the S&P/TSX Composite Index to solid gains. Industrials and consumer discretionary stocks were also broadly higher. Energy names dominated the leader board as West Texas Intermediate crude (WTI) extended its move above $50 USD/barrel. Financials moved higher with the global sector in response to rising bond yields – even though Moody’s reaffirmed its warnings about Canadian banks in the face of high mortgage debt and house prices. The bond-proxy groups – utilities, real estate, and consumer staples – struggled in response to rising interest rates. The materials sector also lagged, as precious metals miners tracked lower with gold and silver prices.

Despite reaching new highs mid-week, the S&P 500 finished virtually unchanged, one of the weakest showings among developed equity markets. As in Canada, financials and energy were among top performing major sectors. Lesser-weighted telecom services led the pack on talk of corporate mergers and acquisitions activity. Higher interest rates drove sell-offs in the bond-proxies, while top individual losers were mostly retailers facing more intense competition.

European bonds followed Treasuries lower, lifting rates, and almost all major equity indexes advanced as both the euro and the pound slipped relative to the U.S. greenback (although the euro retraced some of that move by week’s end). As headwinds from the euro’s recent strength faded, the Centre for European Economic Research’s (aka ZEW) economic sentiment indicator for Germany significantly beat expectations going into this weekend’s German elections. Similarly in Japan, a softer yen versus the dollar led to stock gains. The Bank of Japan, like the Fed, kept rates on hold this week, but unlike the Fed, showed no hints of becoming more aggressive anytime soon. Other Asian markets were generally higher as well, following global stock gains and a higher outlook for economic growth in China from the OECD.

What’s ahead next week:


  • Third round of NAFTA talks in Ottawa
  • GDP (July)
  • Industrial and raw materials price indexes (August)


  • New home sales, pending home sales (August)
  • Conference Board consumer confidence (September)
  • Durable goods orders (August)
  • Second quarter GDP (third estimate)
  • Wholesale and retail inventories (August)
  • Personal income and spending (August)
  • University of Michigan Sentiment (September)

Markets breathe sigh of relief

Gold, yen, U.S. treasuries, and other safe havens all declined this week, while the U.S. dollar and most global equity markets advanced after damage from Hurricane Irma, although devastating, was less catastrophic than feared and North Korea, for a time, held off from testing another missile (it was eventually launched, Friday). There were also signs of better tax and fiscal policy progress in Washington. All three major U.S. equity indexes set new record highs, as did the MSCI All-Country World Index. Gold fell 1.9%, taking a break from its recent surge.

West Texas Intermediate crude prices (WTI) briefly climbed back above $50 USD for the first time since early August as refineries disrupted by Hurricane Harvey continued to resume operations and the International Energy Agency (IEA) raised its forecast of global demand growth. Surging energy stocks led the advance of the S&P TSX Composite. Also contributing significantly to the index’s gains were financials, which benefited from a move higher in global interest rates and bond yields, driven by the sell-off in U.S. treasuries and stronger than expected inflation readings in Britain and the U.S. (finally). The yield on Government of Canada 10-year bonds increased 10 basis points, but even greater gains in the yield of its U.S. counterpart and the stronger greenback pushed the Loonie down a fraction of a cent from its two-year high reached last week. Declining sectors included materials, where U.S. dollar strength led to falling industrial and precious metals prices, and utilities, telecom services, and real estate, all considered “bond proxies” that are pressured by rising interest rates.

U.S. equity markets were led by energy and financials, responding to rising yields and the recovery in crude prices, as they did in Canada. Financials got a further boost from insurers reacting to the better-than-expected Irma news. The S&P 500 Composite Index closed at new all-time highs on four of the five trading days. Utilities (a bond proxy) was the only sector registering a loss.

Share prices in Europe were even stronger than those in North America. The Stoxx Europe 600 climbed to a four week high as the higher U.S. dollar and the unwinding of safe haven currency trades let the Euro give back some of its recent strength that has been acting as a headwind for European stocks. The exception to this trend was in Britain. The FTSE 100 posted the only loss among major equity indexes after U.K. inflation accelerated more than forecasted, prompting a jump in the pound and indications from the Bank of England that its first rate hike in a decade might come soon.

Local currency weakness versus the U.S. dollar was the big story in Japanese equities as well. The Nikkei and Topix indexes saw their steepest increases in more than three months as the yen weakened. Most other Asian markets fared well with the ratcheting down of geopolitical risk early in the week and better than expected CPI data in China that reinforced views of improving global growth. The MSCI Asia Pacific and Emerging Markets indexes both reached multi-year highs.

What’s ahead next week:


  • Manufacturing and wholesale trade sales (July)
  • Consumer price index (August)
  • Retail sales (July)


  • Federal Reserve meeting and rate decision
  • Housing starts and building permits (August)
  • Import and export price indexes (August)
  • Existing home sales (August)
  • Conference Board leading index (August)
  • Markit purchasing managers indexes (September)

Hurricanes, nukes, and central banks shake markets

September didn’t waste any time reminding investors of its reputation as the worst month for markets. Just as Hurricane Harvey petered out, Irma took aim at the Caribbean and Florida. North Korea’s largest yet nuclear test sent investors scurrying for safe havens. Most equity indices sold off and gold jumped 1.6% to its highest since last September. Central bankers upset currency and government bond markets, with yields declining almost everywhere – with Canada being the notable exception where a Bank of Canada rate hike caught most observers off guard and led to a surge in the loonie and Canadian yields.

The holiday-shortened week in North America began with a move toward normalization in oil and gas prices following Harvey, but by week’s end Irma renewed the pressure on West Texas Intermediate crude (WTI) and energy stocks continued their slide. Consumer discretionary was the only sector of the S&P/TSX Composite index to finish measurably in the green. Overall the Canadian benchmark dropped 1.4%, with currency strength adding to the global concerns pressuring equities. Materials led the decliners on base metals weakness, but financials (which comprise a third of the index) contributed most to the index loss, taking their cue from the bank sell off south of the border (where yields fell), rather than from rising yields at home. The Bank of Canada rate hike led to speculation of further rate hikes sooner than what was expected, and pushed the loonie up 2.1% to its highest level since May 2015. Canadian bonds got thrashed as yields on the Government of Canada 10-year jumped roughly 10 basis points and the spread versus its U.S. counterpart fell to a four-year low of 6bp, down from over 80bp just three months ago.

The S&P 500 gave up 0.6%. Telecom services was the weakest sector but the heavier-weighted financials took the greatest toll, as it did in Canada. The sector saw banks pressured by falling interest rates – as hopes for another Fed rate hike this year faded (the 10-year Treasury yield dropped 11bps to 2.06%), and growing worries about potential Irma-related losses to insurers. A deal in Washington to delay the government debt ceiling faceoff only briefly relieved pressure on the U.S. dollar, which has now declined over 10% YTD against major world currencies. Dovish comments from Fed committee members added to the weak dollar outlook, as did new uncertainties about the future makeup of the committee.

Although European Central Bank President Draghi tried to talk down the Euro after the ECB’s meeting this week, the currency, nonetheless, pushed to a two and a half year high and put added pressure on European equities. German’s DAX was the only major European stock index to manage a gain for the week. All major equity markets in Asia and Japan participated in the global sell off. In Japan, as in Europe, currency strength added to the headwinds, with the Yen climbing to a ten-month high.

Economic data overpowers Harvey and Kim

This week began with Hurricane Harvey’s devastating floods in Texas rocking energy markets, and Kim Jong Un’s missile test through Japanese airspace rattling global markets in general. But a steady stream of much stronger than expected economic releases boosted optimism (especially in North America) and equities to solid gains, even as safe havens also advanced, including gold, the U.S. dollar and treasury bonds. A disappointingly weak U.S. employment report Friday looked to undo some of the moves but was quickly shaken off.

Canada’s S&P/TSX Composite stumbled out of the gate Monday, as Harvey wreaked havoc on energy prices and President Trump’s comments continued to complicate NAFTA negotiations. Gulf of Mexico refinery closures in the wake of Harvey crimped demand for oil, and the price of West Texas Intermediate crude (WTI) fell 1.2% (while retail fuel prices spiked higher). Surging gold and materials stocks were not enough to overcome the downward pressure. Tuesday opened with a further dip as investors reacted to the North Korean test. But as geo-political fears ebbed, the economic data deluge started. Consumer confidence marked a stronger-than-expected reading in the U.S. – the second highest of this economic cycle – then in Canada jumped to the best level in nearly a decade. Gross domestic product (GDP) was similarly above expectations in both countries: in the U.S. the second quarter pace was revised up to the fastest in two years, while in Canada a six-year high in monthly GDP growth punctuated the fastest 12-month advance since 2006. By week’s end Canada’s benchmark equity index had gained 0.9% led by the strength in materials, especially gold stocks as the yellow metal jumped 2.7% to a new year-to-date high. The loonie, which had retreated 1.3% from last week’s close just above 80 cents U.S., surged on the GDP data to close up 0.8%.

The U.S. dollar index touched a two year low early in the week, but rebounded and strengthened steadily once geopolitical tensions eased and economic data showed the economy on a firm footing. U.S. 10-year treasury yields, initially falling 8 basis points to 2.09%, climbed back to 2.16%, helped by the stabilizing of the dollar and indications that the European Central Bank may delay its decision to wind down stimulus. The S&P 500 climbed 1.4% led by strong gains in health care, information technology, and industrials – all indicative of renewed economic optimism.

Following the trend set by Canada and the U.S., Euro area confidence rose to its highest level this decade. Other signs of economic strength included German unemployment falling to its lowest since reunification, and a flash estimate showing a jump in consumer prices. But equity markets were mixed, with some, including Germany and Spain, down as recent strength in the Euro continued to weigh on stocks. On Wednesday, the currency touched its highest level versus the dollar since January 2015.

Share prices in both Hong Kong and Shanghai posted solid gains as economic data in China reflected growth above expectations. And in Japan, the yen losing ground to the U.S. dollar helped the Nikkei 225 index advance 1.2%, led by banks and electronics firms.