Financial markets seem bound in a trading range, perhaps waiting to see how a number of near-term risks unfold. The increasingly strong U.S. dollar is causing further anxiety coincident with the market’s interpretation of an imminent December Fed rate hike. The U.S. economy appears to have reached full employment, while other developed world economies require further stimulus. While developed world equity markets have reacted calmly to increased geopolitical risks – tighter border controls and other security restrictions could further stall the Eurozone recovery.
The month’s first half initially saw October’s positive momentum continue, only to sell off on renewed uncertainty surrounding the repercussions of an imminent Fed rate hike. U.S. stocks initially gained – marking a sixth straight weekly advance despite convictions that the Fed would raise rates in December, especially given favourable data such as: payrolls increasing by 271,000 jobs, the unemployment rate falling to a seven-year low of 5.0%, and a 2.5% annualized rise in hourly earnings. Fed Chair Janet Yellen, in her congressional testimony, told the House Financial Services Committee that the prospect of a December rate increase was a “live possibility” if the economy continued to perform well. Auto sales continued with strong momentum as major automakers reported double-digit increases over the past year. Light vehicle sales increased 13.6% (annualized) in October – putting the U.S market on track for the strongest annual results in history. Oil prices continued to vacillate and contribute to a short-lived rebound in energy companies. Conflicting data drove volatility as the Commerce Department reported that retail sales gains were negligible. Conversely, the University of Michigan’s consumer sentiment index surpassed most expectations at a four-month high. Investors seem bewildered at the significance of a highly probable Fed rate hike in December in light of soft inflation and consumer spending reports. In Canada, economic data indicated some bright spots with real exports jumping to 11.5% annualized and 44,000 new jobs added in October – bringing unemployment down a notch to 7%. Job gains were concentrated in Ontario, Quebec and B.C while oil patch provinces continue to reduce their head count. A downturn in commodity prices also weighed on stocks, with oil prices falling 10% in a fortnight, and copper prices touching 2009 levels. By the end of the second week, Canadian and U.S. equities retreated 4%. Europe was also down 3% on news that Eurozone economic growth slowed unexpectedly in the third quarter.
Despite the terrorist attacks in Paris punctuating the mid-point of the month, global equity markets proved resilient. U.S. stocks rose as market sentiment was supported with signs that the Fed would cautiously raise interest rates before Christmas – their meeting notes confirming that conditions for a rate rise may “well be met”. The Fed also specified that its path of policy normalization would be very gradual. Firming inflation data further supported a rate hike as core consumer prices increased to 1.9%, close to the Fed’s 2% target. Meanwhile, the labour market continued to stabilize, with initial claims for unemployment benefits in in mid-November falling to 271,000 from 276,000 in the previous week. European indices were surprisingly calm in the wake of the Paris terrorist attacks. Perhaps investors are confident that a coordinated international coalition will be sufficient to eliminate further ISIS threats. What’s more, investors have been encouraged by the ECB’s signaling of further measures to tackle that region’s deflationary problems. In a speech at the end of the week, ECB president Mario Draghi stated that ECB policymakers would “do what they must to raise inflation as quickly as possible”. Draghi’s speech was interpreted by investors as a harbinger for additional monetary stimulus measures at the ECB’s next board meeting. Over the last two weeks of the month, markets partially recovered their first-half losses: the U.S. and Europe both finished up 1.3%, Canada’s TSX was up 1%.
At the end of the month, Canada’s TSX slipped by 0.23% with the Health Care sector over contributing at 22%, buffering the drag from metals and mining (-18%). The S&P 500 was slightly positive at 0.3% while the EAFE indices declined 1.5%. North American bond indices initially dipped 1% in anticipation of a rate hike, only to recover as much on heightened geopolitical risks. The almost certain Fed rate hike caused Emerging Markets to sell off by 3.9% A 2% monthly loss to the loonie bolstered foreign equity returns to investors holding globally diversified portfolios, bringing the MCSI World Index up 1.4% in Canadian dollar terms.