August 07, 2018 – KERR MARKET SUMMARY
It was another eventful month from the perspective of economic data, trade rhetoric by President Trump and Q2 earnings releases, but the more subdued equity market behaviour clearly demonstrated that summer was in full swing. The volatility that did appear in equity markets from better-than-expected or worse-than-expected Q2 earnings was short-lived, as were the more technically-driven movements in the bond market.
Economic data releases throughout July remained supportive of continued strong growth in both Canada and the U.S., with little evidence yet to suggest a meaningful negative impact from trade tariffs imposed to date although manufacturers are expressing concerns regarding the impact of trade policies on input prices. In addition, there continues to be mounting evidence of labour shortages across certain industries in the U.S., notably truck drivers, putting further pressure on input prices through higher wages. In Canada, the housing market remains more subdued, the consumer appears to have returned and the most recent GDP numbers suggest more balanced growth across the economy. Notwithstanding the positive data, a cloud of uncertainty remains related to trade policies, concerns over an aging business cycle, and housing market risks.
The Bank of Canada resumed increasing interest rates at its July 11 meeting although the move higher was largely expected by market participants and had little impact on the bond market. The Bank noted that the economy is operating close to full capacity and it expects GDP to expand faster than potential. CPI inflation is expected to rise to about 2.5% “before settling back to 2% by the second half of 2019”. Moreover, the impacts of U.S. tariffs on steel and aluminum were “expected to be modest”. The bank did, however, caution about the impact of uncertainties related to trade on investment and exports which are “now judged to be larger” (than April’s estimates) given mounting trade tensions. The bigger story in the bond market was the move higher in long-term bond yields, which was largely driven by supply factors in the U.S. and policy announcements by other major central banks that impact the relative attractiveness of U.S. and Canadian long-term bonds. Overall, the Canadian bond market (FTSE Canada Bond Universe) was down 0.7% in July, with corporate bonds doing slightly better at -0.5% as corporate spreads tightened slightly at the long end of the curve.
The vast majority of both developed and developing equity markets moved higher in July, supported by continued favourable corporate earnings growth, China’s announcement that it would increase infrastructure spending and take other measures to bolster growth, and more subdued movements in the USD, which is a significant driver of capital flows. However, the biggest story in an otherwise reasonably quiet month was the unexpected negative earnings reports from Facebook, Intel and Twitter which weighed heavily on the technology sector and broader equity market during the last few trading days of July. Overall, the S&P/TSX, S&P 500 and MSCI EAFE Index returned 1.2%, 2.7% and 1.4%, respectively, last month (CAD).
In oil markets, the decision by OPEC in late June to begin increasing production by up to 1 million barrels per day starting in August put a lid on the oil price rally, with the price of WTI falling 7.3% (USD) in July.
The summer doldrums were seen in currency markets as well, with most major currencies little changed against the U.S. dollar although the loonie did make some gains, closing the month up 1% to $0.768 US.
Sources: National Bank Financial, Morningstar