March’s market performance continued with the positive momentum that finally took hold in the latter part of February. A number of risk factors that were previously top of mind were allayed while, at the same time, the brutal reality of geopolitical risk once again darkened the doorstep of the Western World. The Fed’s recent dovish statements about a slower pace of rate tightening reversed the negative sentiment that was in place for most of the first quarter. U.S. inflation appears to be rising but is still below the Fed’s 2% target – thus giving the Fed more time to implement its plans. The absolute relative strength of the greenback softened this past month – a 3.7% drop against the global basket of major currencies assisting commodity prices, EM currencies and corporate earnings in its wake. Finally, crude oil had a reasonable comeback posting a 12% increase for the month. Given oil’s recent positive correlation with equities – March’s equity rally could prove to be an early April fools’ joke as there has been no improvement to the supply-demand imbalance. Given that Oil has had several temporary bounces off the “bottom” before, a corresponding disappointment in equites is almost a certainty should there be an absence of any other encouraging data when Oil retreats.
The month’s first half saw equity markets continue to build on the “risk on” sentiment that started in late February – global equites marking their third week of solid gains with some indices wiping out the hefty losses from the start of the year. Unexpectedly strong data out of the U.S. supported the momentum as February’s non-farm payrolls topped 240,000 new jobs. In addition, bargain seekers added to trading volume while speculators weighed in to cover their short positions. European equites also followed suit despite the region’s most recent negative inflation reading – prices falling 0.2% in the last year with low energy prices adding to the deflation. European monetary policy became much more supportive of economic activity with further announced stimulus measures – a €20B expansion to its QE program (now €80B). A 10bps cut to its deposit rate to -0.40% was also added for good measure. Meanwhile at the G20 gathering in Shanghai, China displayed some adept policy with its central bank cutting the reserve requirement ratio for domestic banks for the fifth time in the last year. While this his alleviates a growing cash crunch in China by freeing up an estimated $108 billion in funds, other data such as slumping trade data in both the import and export categories remains indicative of slowing global growth. Investment-grade corporate debt also started to see a change in fortunes – again as buyers piled into overly discounted valuations. The sector rallied and spreads tightened on the back of increased global macroeconomic stability. High yield bonds rallied and significantly outperformed investment-grade debt as cash continued to flow into the asset class. For the first half of the month, Canadian and U.S. equities were up 5.3% and 6% respectively. EAFE markets rallied 7%.
During the month’s second half, a dovish Fed encouraged investors even further. Not only did the FED leave interest rates unchanged, it also made mention that it was cognizant of the risks to the global economy. The Fed adjusted its rate hike expectations downward to 0.9% over the course of two hikes, not four as indicated in their December statement. Both bond and equity markets rallied in recognition that a key downside risk to the economy was sidelined – U.S. indices rising sufficiently to erase the losses from the start of 2016. Markets understandably stalled on the horrific news of the terrorist attacks in Brussels. Apart from a temporary uptick in safe haven assets such as Gold, the Yen and the U.S. dollar, the terrorist attacks had little impact on global equities. Meanwhile, back at home, investors lightly applauded the Liberal Government’s first budget which promised deficits of $30B in the coming years – half of which will be directed at new government expenditures in housing, transit and infrastructure. Economists expect this enhanced spending should improve future growth and productivity of the nation. For the last two trading weeks of the year, Canadian, U.S. and EAFE equities were mixed at -0.1%, +0.5% and -0.5% respectively.
At the end of the month, Canada’s TSX led other major indices to positive territory with a gain of 5.3% with the once-shunned sectors like Energy (+13%) and Metals/Mining (+21%) supporting the gain. In local currency terms, the S&P 500 had a strong month at +7% while the EAFE indices also increased by 6.5%. Along with the rise in oil, the loonie appreciated 4% for the month – tempering the S&P 500 and EAFE indices to 2.4% and 2.2% respectively in Canadian dollar terms. Emerging Markets finally reversed their slump with a 13% gain in local currency terms and a two- year record of capital inflows.