Weekly Market Watch – Global Economy Demonstrating Strength – Friday, June 2, 2017

June 2, 2017

Global Economy Demonstrating Strength

The international economic calendar was full this week with many indicators pointing to a strengthening global economy.  Starting in Canada, GDP accelerated to a 3.7% annualized pace in Q1 making it one of the best quarterly expansions since the recession. Statistics Canada also raised its growth estimates for the previous quarters in 2016 to 2.7% for Q4 and 4.2% for Q3 confirming the country is in one of its strongest periods of expansion since 2009. Turning to the U.S., consumer spending rose at the fastest pace in four months in May while manufacturing activity and factory hiring also picked up last month. Private payroll figures released Thursday also point to a strengthening U.S. economy as hiring at private companies increased in May at the fastest pace since 2014. Turning to Europe, ECB President Mario Draghi cautioned it was too early to reduce the bank’s stimulus measures in testimony before the European Parliament on Monday in Brussels. Pressure to let up on stimulus has been building in step with the region’s nascent rebound but inflation data released this week was the weakest this year supporting Draghi’s call for continued accommodative policy. Also in the euro zone, the unemployment rate fell to 9.3%, the lowest level since 2009. Elsewhere, a gauge of Chinese factory activity was unchanged in May from April at 51.2 (a number above 50 indicates expansion) suggesting firmness in the world’s second-largest economy. Looking ahead, market watchers get the most complete picture of the U.S. employment situation today as jobs numbers are released while the U.K. goes to the polls next Thursday in what’s become a fresh test of Briton’s appetite for Brexit.

Strong Month for U.S. Stocks

Major U.S. stock benchmarks ended May solidly in positive territory while the TSX was lower. For the four days covered in this report, the Dow added 64 pts. to close at 21,144, the S&P 500 moved ahead 15 pts. to end at 2,430 and the Nasdaq gained 36 pts. to settle at 6,210. The TSX was up 53 pts. for the four days closing Thursday’s session at 15,469.

Searching for Opportunities Abroad

Equities: We recommend caution in putting new money to work but remain over-weight equities in anticipation of a 3%-7% spring-summer correction.  Our strategy is to seek out less expensive stories by lightening up on the U.S. and moving that exposure to Europe. We continue to believe European equities could close the valuation gap as previous headwinds  (inflation, negative banking sentiment, political risks, Euro break-up fears) switch over to tailwinds (GDP, PMI, and business/consumer confidence, benign USD).  Europe and other International regions stand to benefit from potential U.S. equity outflows as positive economic surprises continue apace and market participation in the U.S. continues to narrow on every new high.  Long-term we remain equity bulls.