December 01, 2017 – KERR MARKET SUMMARY – Volume 7, Number 22
It was an eventful November across financial markets, with a plethora of economic data, oil market news, political events and fiscal developments to keep investors occupied. The majority of financial markets continued on their upward trend as continuously upbeat corporate earnings, rising global economic growth and gradually normalizing monetary policies underpinned investor confidence in the face of some uncertainties on the horizon.
On the economic front, Canadian indicators remained consistent with the view that economic activity is holding at an above-trend pace in the second half of 2017. A softer Canadian dollar, decelerating but still expanding economic activity, rising wage growth and pre-recessionary low unemployment levels all suggest inflation will trend modestly higher over the next year. Diminishing slack in both Canada and the U.S. will provide comfort for both the Fed and Bank of Canada to continue normalizing interest rates.
As the U.S. economy’s strength persists, there is debate over the need for fiscal stimulus. The proposed U.S. tax cuts, in their current form, would provide a boost to income and spending levels as well as corporate earnings. This could likely prompt the Fed to raise rates in a more hawkish manner. Congress must reach a compromise in the coming weeks if a bill is to be passed by the original year-end target – a tight timeline. Meanwhile, NAFTA discussions are seeing little progress, with revised negotiating objectives experiencing modest movement towards compromise on several contentious issues. A spring 2018 target appears unlikely at this point.
November saw fixed income markets extend October’s gains, with the FTSE Canada Bond Universe index up 0.8% for the month. The Bank of Canada held its overnight target rate constant and is adopting a more cautious tone towards future raises. Nevertheless, interest rate policy uncertainty is likely to exert pressure on credit spreads in the coming months. With corporate fixed income continuing to outperform its federal and provincial counterparts, shorter-duration corporate bond portfolios are positioned to preserve capital and generate relatively attractive income yield in this environment.
North American equity markets further ascended in November, with the TSX and S&P 500 appreciating 0.5% and 3.0% respectively (in CAD terms). While U.S. tech stocks drove performance, a pullback in this sector ensued at the end of the month, most notably among the FANGs (Facebook, Amazon, Netflix, Google) on concerns their boom may have peaked despite persistently strong fundamental performance. Furthermore, as investors trimmed their tech positions a rotation into financials and healthcare ensued. It is also worth noting that if the proposed U.S. tax reform passes, confidence among equity bulls would likely follow.
Overseas, Eurozone markets gathered pace in November, supported by low interest rates and ECB asset purchases, and remain on track for their strongest annual performance since the financial crisis. Asian shares stepped back from decade highs as Chinese stocks stumbled. Investor confidence in China has been affected by rising bond yields as Beijing steps up its crackdown on shadow banking and other risky financing forms. Higher borrowing costs threaten to squeeze corporate profits. The MSCI World Index and MSCI EAFE Index returned a respective 2.2% and 1.0% in November (in CAD terms).
Oil markets underwent an eventful month, with prices moving cautiously ahead as they hung in the balance of an OPEC decision on whether to extend production cuts. OPEC members and other key producers, including Russia, agreed to continue limiting production until the end of 2018 – an uncharacteristically united front for a notoriously divisive crowd. Oil prices have been rising quite steadfastly, surging 20% since the beginning of September, despite doubts over Russia’s willingness to cooperate with the OPEC-led group. Brent crude closed the month trading at $63.57 USD per barrel, up over 4% for November.
In currency markets, the loonie held relatively steady against the greenback, closing the month trading just below 78 cents USD. While the OPEC extension was expected to support the Canadian currency, its correlation with oil prices has not appeared particularly strong as of late, with rate hike expectations emerging as a driver for the greenback/loonie pair.