Markets began the week on an optimistic note as prospects of war between the U.S. and North Korea appeared to recede. Stocks advanced, volatility declined, and safe havens that rallied on last week’s fears – precious metals, treasuries, yen – all settled lower. But by mid-week, all heck broke loose.
As investors took in the terror attacks in Barcelona and the backlash to President Trump’s handling of the tragic events in Charlottesville, Virginia, stocks saw their second-biggest down day of the year, the yen pushed to a four-month high, and gold broke out to a nine-month high. Trump’s legislative agenda, including tax cuts and infrastructure spending, looked increasingly difficult, and U.S. and Canadian equities, as well as yields on government bonds, gave up the week’s early advances and more. Markets were especially unnerved by rumours that the President’s economic advisor Gary Cohn was resigning. Yields came under further pressure from Federal Reserve meeting minutes that showed central bankers less certain of the temporary nature of below-target inflation. Then Friday, most assets suddenly reversed course again when White House advisor Steve Bannon, a major advocate for Trump’s protectionist agenda, was reported to have left his position. After the rollercoaster, gold, yen, and treasuries ended the week close to where they started.
The S&P/TSX Composite dropped 0.5% for the week. Sector leadership lay with real estate, a so-called “bond-proxy” that gains as yields move lower. Unfortunately, the energy sector, which comprises more than 20% of the index by weight, was hit hard by sliding oil prices. West Texas Intermediate crude (WTI) fell almost 5% mid-week on fears that rising production would offset strong seasonal demand, then recovered Friday to finish the week down just 0.4%. Despite the weakness in oil, the Canadian dollar gained 0.8% versus the U.S. greenback when a modest uptick in core Canadian inflation data was seen as increasing the likelihood of another Bank of Canada interest rate hike this year.
Most U.S. economic data was reassuringly firm. Nonetheless, the week’s unsettling events drove the S&P 500 to a loss of 0.6%. As in Canada, strength in a bond proxy sector (utilities) was offset by weakness in energy names.
Most European and Asian equity markets saw solid gains as U.S.-North Korea tensions eased and managed to stay green through the rest of the week as economic data showed a broad-based recovery taking hold. Germany’s growth for the second quarter, although a touch below expectations, clocked in at its fasted annualized pace in three years. In the U.K., unemployment fell in July to its lowest level since the 1970s, while steady inflation gave the Bank of England room to wait on raising interest rates. Among major equity markets, only Japan lost ground. Japanese gross domestic product (GDP) was better than expected, but stocks retreated under continued pressure from the high level of the Yen versus the U.S. dollar.