Our Weekly Market Snapshot is brought to you by:
Wealth Management Consultant, Capital Core Financial
Weekly Market Snapshot - Week Ending September 14th, 2018
Published September 18th, 2018.
US equities once again regained momentum as most global equity markets were positive on the week. Equities were spurred on by improved prospects for a restart of US-China trade talks. Canadian equities continue to lag as the market awaits more clarity on NAFTA. Adding to the weakness, shares of market darling, Dollarama, dropped ~17% on disappointing same-store sales. North American bond yields rose, despite a weaker than expected US inflation number.
Equity markets were boosted by news that US Treasury Secretary Mnuchin reached out to China in an effort to restart trade talks. However, President Trump’s negative tweets, along with media reports that suggest he is eager to push ahead with the slated $200 billion of tariffs, leaves the situation cloudy. It is little wonder that the Chinese have yet to respond to the invitation, as the mixed messages on all of the US trade files leaves everyone wondering whom we should listen to (and who carries the official authority) when it comes to trade negotiations – President Trump, or the more conciliatory Mnuchin and Lighthizer?
North American bond yields continued to rise. The US 10-year yield once again lingered around the 3% mark and Canadian 10-year yields sit at a one-month high of 2.34%. Yields rose despite some mixed US economic releases, including a softer than expected reading on core inflation and retail sales missing the mark. Markets still expect the Federal Reserve to raise rates later this month and again in December, in-line with our views. However, if core inflation doesn't pick up more meaningfully, it could result in a more gradual pace of tightening next year.
With tightening financial conditions in the developed world, particularly the US, certain emerging market (EM) currencies have been under extreme pressure of late, and particularly those with large US dollar denominated debt obligations. Currency shocks have been a key reason for the poor sentiment towards EM equities. The Turkish lira stabilized after Turkey’s central bank raised rates a whopping 6.25% to 24% (despite calls from President Erdogan for lower rates). The move was welcomed by investors as it was a strong signal that Turkey’s central bank remains independent. Russia also raised its benchmark rate 0.25% to 7.5%, the first hike since 2014. The bear market in EM equities is well established and there is an open question whether EM weakness ultimately leads to a stumble for US equities, or whether the sell-off in EM is overdone and there is a catch-up trade to play. EM equity valuations are more attractive than earlier this year (MSCI EM Index currently trades at 11.25 X 12-month forward earnings compared to 17.2 X for the S&P 500). Trade uncertainty is likely to continue to weigh on EM markets. Given the volatile nature of EM, we continue to be comfortable with our underweight recommendation.
Chart of the Week: Stuffed Oil Pipelines –WCS Spreads Widen and Crude-by-Rail Benefits
Pipeline constraints are weighing on the Canadian energy sector. While the Trans Mountain expansion wouldn’t provide immediate relief, delays to the project add to the negative sentiment. A key indicator of the severity is the differential between WTI and Western Canadian Select (WCS) crude oil prices, which sit at a four-year high of US$36/bbl. The most viable alternative to pipelines is crude-by-rail (CBR). This is a costlier option which ends up getting factored into the WCS price; a cost ultimately borne by Alberta’s energy patch. CBR exports out of Western Canada hit a record 205 million bbls/day in June, an 86% increase from the same month last year. While we expect the WCS differential to retreat somewhat through the end of the year, longer-term, Western Canadian production is set to continue to rise. Is there a silver lining? There is if you’re a railroader!
The week in review
US CPI inflation (August) rose 0.2% m/m (versus +0.3% expected), the y/y rate fell to 2.7% (versus +2.8% y/y expected). Core prices rose 0.1% m/m (versus +0.2% expected) dropping the y/y rate 0.2% to 2.2% y/y (versus +2.4% expected).
US retail sales (August) rose 0.1% m/m (versus +0.4% expected).
US industrial production (August) rose 0.4% m/m (versus +0.3% expected), the 4.9% y/y, pace is the fastest since December 2010.
The European Central Bank (ECB) & Bank of England (BoE) both left monetary policy unchanged, with the ECB intending to cut monthly asset purchases in half to €15 billion starting in October, and the BoE maintaining its balance sheet at £435 billion.
Japan’s real GDP (Q2) was revised to +0.7% q/q, markedly higher than the preliminary estimate of +0.5%.
China’s fixed-asset investment growth (YTD August) slowed from 5.5% to 5.3% y/y (versus +5.6% expected). Industrial production slowed 0.1% to 6.5% y/y and retail sales held steady at 9.3% y/y (both in line with expectations). Consumer prices (August) rose 2.3% y/y (versus +2.1% expected).
The week ahead
Canadian inflation and retail sales data
US and Canadian housing data
Eurozone and UK inflation data
US, Europe and Japan preliminary PMI readings
BOJ monetary policy meeting
Your Wealth Management Resources Team at Capital Core Financial
Clarke Haynes, FPSC Level 1®, BBA, CIM®, EPC®, RRC®
Wealth Management Consultant, Capital Core Financial