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.