Cautious tone sweeps markets

Global financial markets saw sentiment shift distinctly more negative this week. A variety of concerns pushed virtually all major equity indices into the red (save for the NASDAQ, which climbed to another record high). Signs of opposition to the details of U.S. tax reform efforts began surfacing while a political scandal in Alabama threatened to reduce the Republicans’ senate majority. A slew of weaker economic data in China, especially a sharp pullback in lending, raised fears of an imminent slowdown in activity and put pressure on industrial commodities. Oil prices declined sharply after industry data showed U.S. stockpiles unexpectedly rising and as Russia was seen to be wavering on the need to extend output cuts.

Stronger U.S. inflation numbers boosted expectations of a steady pace of interest rate hikes from the Federal Reserve. But, even as short term rates rose, a decline in long term yields (‘flattening the yield curve’) suggested investors are increasingly concerned that the pace of rate hikes may crimp economic growth.

The heavily weighted energy sector took the biggest toll on the Canadian benchmark S&P/TSX Composite, which slumped from its record high reached last week. The drop in crude prices also weighed on the Canadian dollar, seemingly reasserting the tight link between oil and the Loonie that dominated the currency’s moves for a number of years until Canadian and U.S. relative interest rates took over more recently. The beginning of the fifth round of NAFTA negotiations, with an overhanging threat of the treaty’s nullification by President Donald Trump, added to the worries of Canadian investors. The health care sector also declined sharply, as big drops were registered by both Valeant Pharmaceuticals International Inc. and Canopy Growth Corp., which together comprise over 60% of the sector’s index weight. Telecom services, technology, and consumer discretionary were among the sectors with the best gains.

In the U.S., consumer stocks generally gained ground after a report that September retail sales increased more than expected, signalling resilient demand heading into the holiday shopping season. Telecommunication services and financials were also among advancing sectors. Regional banks, in particular, got a boost from a senate deal to lift the Systemically Important Financial Institution (SIFI) designation for banks with less than $250 billion of assets. But the S&P 500 retreated slightly overall, with the index unable to overcome the big drop in energy stocks.

Major European indices all fell, taking their cue from global growth concerns, and ignoring continued strength in economic data out of the Euro area itself. An acceleration in German gross domestic product (GDP) anchored a solid GDP report for the region. In the United Kingdom, investors continue to worry about increasingly negative Brexit headlines, inflation stuck at a five-year high, and the fragility of Prime Minister Theresa May’s leadership. In Asia, bond yields and equity prices both reacted with concern over tightening credit conditions in China. And in Japan, stocks retreated from recent 25 year highs as third quarter GDP reportedly decelerated sharply from the previous quarter.

What’s ahead next week:

Canada

  • Retail and wholesale sales (September)

U.S.

  • Leading index (October)
  • Existing home sales (October)
  • Durable goods, capital goods orders (October – Prelim.)
  • University of Michigan sentiment survey (November – Final)
  • Markit purchasing managers indices (November – Prelim.)

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