Politics Take Centre Stage
Political flashpoints were in the spotlight this week with the U.K. voting and former FBI Director Comey testifying. Starting in the U.K., Prime Minister Theresa May suffered a sharp setback in her hopes to strengthen her political hand in Brexit negotiations by failing to win an outright parliamentary majority in Thursday’s election. May now faces the prospect of a ‘hung parliament’ in which she’ll have to scramble to get enough seats to form a government. The result raises the possibility that Brexit talks –already on a tight timeline – may become more complicated. Turning to Washington, there were no fireworks coming from former FBI Director James Comey’s senate testimony about Russian meddling in the presidential election but he did say he felt his independence was threatened by the Trump administration. Elsewhere, the ECB maintained its ultra-loose stimulus measures at the bank’s policy-setting meeting Thursday. Bank head Mario Draghi said it was premature to reduce efforts to revive the region’s economy despite upticks in growth, employment and bank lending. The dovish stance was cheered by markets as the prospect of “looser for longer” was well-received by traders. Meantime, the World Bank maintained its 2.7% global growth forecast in its Global Economic Update report released last weekend. This marked the first time in several years the growth estimate has not been downgraded. Turning to economic news, the most notable data point came from the U.S. where the number of U.S. job openings reached a record high in April rising to the highest level since 2000 when the government first started tracking the figure. Looking ahead, the central banks of Japan, England and the U.S. meet next week with all eyes on the Fed to raise interest rates.
North American benchmarks were relatively muted this week with traders hesitant to take big positions ahead of Thursday’s political developments. For the four days covered in this report, the Dow fell 24 pts. to close at 21,182, the S&P 500 shed 6 pts. to end at 2,433 and the Nasdaq added 16 pts. to settle at 6,321. In Canada, the TSX ended the period down 19 pts. to finish at 15,423 at the close of trade Thursday.
Summer Volatility Possibly Ahead
Strategy: While Canada’s underperformance relative to other global markets should unwind itself in coming weeks/months, a pending kick-off of talks to renegotiate NAFTA could maintain bouts of volatility for some time yet. On the economic front, indicators suggest the pace of activity globally has remained solid through the first five months of 2017, benefitting from a rebound in business investment and healthy employment growth. As a result, we see global GDP growth holding near 3% (the top end of this cycle’s range) leaving recession risks over the coming year quite low. Thus, our asset allocation approach remains biased toward equities over bonds within a medium-term investment strategy. However, we believe momentum within equities has waned alongside a deterioration in the breadth of sectors supporting recent market gains. Thus, we advise some caution in putting new money to work at the current time amidst a turn in seasonal pressures that could result in elevated volatility over coming months.