For the first time in two years, the Canadian dollar climbed this week to above 80 cents U.S – powered by a strong economy, rising interest rates, and a weak U.S. currency. The Loonie’s strength weighed on Canadian stocks, pressing the S&P/TSX to a loss of 0.4%. South of the border, the second quarter earnings reporting season got into full swing, powering all major U.S. stock indexes to new record highs before they rolled over late in the week. Government bond yields in both countries gained for the week, despite a brief dip on the Fed rate announcement, with the Canada-U.S. spread narrowing on the Loonie strength.
Canada’s Gross Domestic Product (GDP) for May was reported on Friday to have grown at a stronger pace than forecast, posting the highest year-over-year gain in 15 years. Just days earlier the International Monetary Fund (IMF), in its latest World Economic Outlook, predicted Canada would lead G7 growth this year. An improving Chinese outlook sparked large gains in miners, such as Lundin Mining Corp. and Hudbay Minerals Inc., as copper prices hit two year highs. Energy names drew strength – first from a report Saudi Arabia would cap its exports at a lower level, and then from EIA (the U.S. Energy Information Administration) data showing a crude oil draw more than double what was predicted. West Texas Intermediate (WTI) oil jumped over 8% on the week. None-the-less, the Canadian stock benchmark struggled under pressure from the rising dollar. Adding to the negative sentiment was the cancellation of Petronas’ plans for a liquefied natural gas terminal in British Columbia. S&P/TSX decliners were led by gold producers, railroads, and financials.
In the U.S., strong corporate earnings were backed up by mostly solid economic numbers, including GDP, consumer confidence, durable goods orders, and the manufacturing PMI (purchasing managers index). Fresh index highs mid-week came on big name moves in response to earnings – Facebook in particular for the NASDAQ Composite, and Boeing and Verizon Communications for the Dow Jones industrials. Health care was the main laggard group, thanks to uncertainty in Washington’s reform efforts. Stocks pulled back mid-day Thursday as traders and investors continued to digest Wednesday’s Federal Reserve statement, suggesting they were in no rush to raise interest rates with inflation remaining below target, but that its balance sheet reduction (unwinding of QE, or quantitative easing) could begin “relatively soon”. The S&P 500 Composite was virtually unchanged for the week.
European economic news was mixed with disappointing PMIs in France and Germany, bringing to an end the Eurozone PMI’s 11-month streak of gains. This was followed just the next day by Germany’s IFO business climate index unexpectedly climbing to a new record high. Many European indexes closed the week in the red, pressured (like Canada) by a stronger currency. U.S. dollar weakness, commodity strength, and the improving China growth expectations boosted many emerging markets and pushed the MSCI EM index to a three-year high. But in Japan, the dollar weakness pushed the Yen to its highest level since mid-June, pressuring stocks and leaving the Nikkei down 0.7%.