Our Weekly Market Snapshot is brought to you by:
The Wealth Management Team, Capital Core Financial
Week Ending: March 8th, 2019
Published: March 11th, 2019.
Generally disappointing economic data, most notably the weak U.S. jobs report and the Chinese trade data, and further dovish messaging from a host of central banks, saw bond yields decline and equity markets finish in the red across the board for the week. The ECB’s actions saw the euro weaken relative to the U.S. dollar, providing a further headwind for U.S. corporate earnings growth. The S&P 500 fell below its 200-day moving average and had its worst week of the year.
This week marked the 10th anniversary of the S&P 500’s historic bull market run. Since the March 9, 2009 lows, the S&P 500 is up 306% cumulatively (15.0% annualized). In the near term, global equities appear to have entered a period of consolidation following the ~20% run-up since the December 24 lows. We feel markets have moved too far, too quickly and we wouldn’t be surprised to see a checkback somewhere in the 5 to 10% range. The market is about to skate onto some thin ice – namely due to the data drought that typically happens late in every quarter where the market trades off of very little concrete information. Fourth quarter earnings are essentially done, and we have time to wait until the next Fed announcement on March 20. We believe most of the positives on trade are priced in, so disappointment is more likely than upside surprises. The risk-reward is not symmetric; it’s skewed to the downside now. This doesn’t mean we expect disappointment, just that the hurdle for a further positive surprise has been raised now that expectations have shifted dramatically in the past two months. Brexit uncertainty remains and things appear to be coming to a head as we approach the end-of-March “deadline”. We don’t think Brexit necessarily matters to global markets, but it could be a convenient excuse for a selloff in a market that we think would be happy to take one.
The energy sector was a drag on Canadian equity returns this week, while gold stocks outperformed along with the interest-rate-sensitive sectors. Yet more negative pipeline-related news provided a stark reminder of the challenges facing the energy sector. Permitting delays in Minnesota resulted in Enbridge announcing that its Line 3 replacement project would be delayed until the second half of 2020, compared to the late 2019 start date the company had previously been expecting. Crude-by-rail should be able to fill much of the gap, but the Alberta government may have to extend curtailments beyond the end of this year to help balance the market. Adding to the negative sentiment, the Norwegian sovereign wealth fund announced they would be divesting a portion of their oil and gas holdings. This is a $1 trillion fund, which includes many Canadian producers, and the news provided another headwind for the group that has been starved of positive catalysts. Canadian Natural Resources (CNQ) was one of the producers hit hardest by all this negative news. CNQ reported a fourth quarter loss during the week, weighed down by the tough pricing environment in Q4. They did, however, point to the more constructive environment since the turn of the year and announced a 12% dividend hike.
Chart of the Week: Bond Yields Weighed Down by Dovish Central Banks
Global bond yields fell sharply on the week as dovish messages from both the BoC and the ECB pushed out expectations for future rate hikes. The BoC highlighted “increased uncertainty about the timing of future rate increases”, while the ECB changed their guidance saying they now expect rates to stay where they are “at least through the end of 2019”, instead of the “summer of 2019” previously. The ECB downgraded their outlook for growth and inflation, most notably cutting 2019 growth to 1.1% from 1.7% previously. Additionally, the ECB launched a new set of targeted long-term refinancing operations – a fresh round of monetary accommodation aimed at shoring up a weakening economy.
The drop in bond yields resulted in weekly gains of over 1% for the FTSE Canada Universe Bond Index. The 2.6% YTD return now exceeds the total returns in each of the last three calendar years. With central banks taking a step back and a slower path toward a lower end-point, our 2019 base case now sees Canadian fixed-income returns in the low 3% range. Additionally, there’s increasing discussion of the need for central banks to cut rates as their next move. While not our base case view, this scenario could drive calendar year returns in the order of 4 to 5%.
The week in review
Canadian employment (Feb.) rose 55,900 (versus +1,200 expected), while the unemployment rate held steady at 5.8% (as expected). Average hourly wages rose 2.3% y/y, up from 2.0% in the prior month.
Canadian merchandise trade deficit (Dec.) widened to $4.6 bln (versus $2.1 bln expected), from a $2.0 bln shortfall in November. Exports fell 3.8%, while imports rose 1.6%.
The Bank of Canada (BoC) and the European Central Bank (ECB) both left interest rates unchanged and provided a dovish outlook.
U.S. employment (Feb.) rose 20,000 (versus 180,000 expected). The unemployment rate fell 0.2% to 3.8%, while average hourly earnings rose 3.4% y/y, up from a downwardly revised 3.1% in the prior month.
China’s trade surplus (Feb.) dwindled to just $4.1 bln USD (versus $26.2 bln expected), down from January’s $39.2 bln balance. Exports fell 20.7% y/y, while imports fell 5.2%. Separately, China’s National People's Congress announced the official growth target for this year would be between 6.0% and 6.5%, down from last year’s 6.8% target.
February Purchasing Manager Index (PMI) recap: U.S. ISM non-manufacturing rose 3.0 to 59.7; Eurozone services PMI was revised up to 52.8 (versus 52.3 initially); U.K. services PMI rose 1.2 to 51.3; Japan Nikkei services PMI was up 0.7 to 52.3; China Caixin services PMI fell 2.5 to 51.1.
The week ahead
U.S. and European inflation and industrial production
U.S. retail sales and durable goods orders
BOJ monetary policy meeting
Key Brexit votes
Chinese readings on industrial production, retail sales and fixed-asset investment
Have a great week!
Your Wealth Management Resources Team at Capital Core Financial