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.
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