November 01, 2017 – KERR MARKET SUMMARY – Volume 7, Number 21
With third-quarter earnings season underway, financial markets continued their upward trend against a backdrop of low volatility last month, with investors remaining calm and focusing on the positives. Solid corporate earnings, rising global economic growth and gradually normalizing monetary policies have been identified as the key factors that will provide a tailwind for financial markets.
On the economic front, the themes of globally synchronized expansion and central bank normalization remained at the forefront. Last week the Bank of Canada kept its benchmark interest rate unchanged after raising it twice in Q3. In a scheduled announcement, Governor Poloz advised that policymakers held off this time in part because the loonie’s recent strength is expected to slow inflation. The BoC also pointed to areas of concern involving geopolitical developments, domestic housing risks, the sensitivity of indebted households to interest rates, a rising loonie, as well as U.S. fiscal and trade policies such as the NAFTA renegotiation. Yet the Bank emphasized that growing foreign demand, recent commodity price growth, still-low borrowing rates, infrastructure spending, and expanding business investment should all lead economic activity in a sustainable trajectory, with future rate hikes likely on the horizon.
The Bank of Canada also announced updated projections for economic growth (as measured by real GDP) last week, forecasting a robust 3.1% for 2017 and a still-solid 2.1% for 2018. The Canadian economy grew at a rate of 3.7% in the first three months of 2017, followed by 4.5% in Q2. The BoC’s latest outlook forecasts an expansion of 1.8% for Q3, and 2.5% for Q4. South of the border, U.S. GDP expanded at a robust clip of 3% in Q3. This news was welcomed by the White House – not only does it exceed the 2.5% consensus forecast but it demonstrates that hurricane season did not materially impact the U.S. economy this quarter.
Last month saw fixed income markets fully recover from September’s downward pressure. The TFSE Canada Bond Universe index gained 1.6% in October. Corporate bonds continued to outperform their federal and provincial counterparts.
Equity market strength was underpinned by strong earnings last month, the vast majority of companies beating expectations. The tech sector was a notable standout, with especially upbeat reports from giants Alphabet, Amazon and Microsoft. Bank stocks around the world also gained, from Canada’s Big Six to UBS and Wells Fargo, to Royal Bank of Scotland. The TSX and S&P 500 appreciated a respective 2.7% and 5.7% this month. European shares hit a five-month high, buoyed by one of the largest drops in the euro so far this year. The currency fell after the European Central Bank signalled it would tread carefully and slowly with respect to stimulus removal. Confidence among equity bulls ensued. Monetary policy in the Eurozone is likely to remain loose for some time as it lags North America’s inflation and employment levels. Asian equities also rose alongside positive earnings results in India and Japan. The MSCI gained 5.3% in October.
In currency markets, the U.S. dollar accelerated in October – climbing almost 4% against the loonie and 1% against the euro. This is quite different from the greenback’s drop of six to 10% against a number of global currencies for most of 2017. Investors have begun moving money into international markets, a result of U.S. markets appearing the priciest globally. Last month the U.S. House of Representatives passed a resolution that brings tax cuts one step closer – triggering the greenback to further extend its rally. The loonie closed the month trading just below 78 cents USD, down for the month against a background of unchanged interest rates.
Oil prices extended in October, with benchmark Brent crude trading at a more than two-year high of above $61 a barrel, buoyed by comments from Saudi Arabia’s crown prince backing the extension of OPEC-led output cuts.
Sources: Capital Economics, National Bank Financial Markets, Globe Investor, TD Economics