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.


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