Weekly Market Watch – U.K. Raises Rates, Trump Nominates New Fed Chief – Friday November 3, 2017

November 3, 2017

U.K. Raises Rates, Trump Nominates New Fed Chief

Market watchers had a busy calendar of events to follow this week with plenty of GDP reports, political developments and monetary-policy news. Starting in the U.K., the Bank of England raised interest rates to 0.50% from 0.25%, the first rate rise in more than a decade. The bank also indicated it foresees two more rate increases before 2020 is out. In Washington, President Trump nominated Jerome Powell to head the Federal Reserve who is expected to follow the bank’s gradual approach to monetary policy. In related news, the Fed stood pat on rates Wednesday at its policy-setting meeting but signaled it remains on course to raise rates once more this year. Turning to the Bank of Japan, it refrained from tweaking its monetary policy at the bank’s meeting mid-week and made no changes to its asset-buying program. Meantime in Washington, the Trump tax plan was released Thursday which would take the corporate rate from 35% to 20%, compress a number of individual brackets and repeal taxes paid by individual estates by 2024. With regard to GDP prints, eurozone data showed the single-currency union decelerating from an annualized 2.6% in Q2 to 2.4% in Q3. Despite the contraction, the 19-member region remains on course to post its strongest year of growth since 2007. In related news, eurozone businesses and consumers are more upbeat about their prospects in almost 17 years as an economic sentiment indicator rose to its highest level since January 2001. In Canada, the economy recorded its first contraction in GDP since October 2016 after falling 0.1% in August. The negative print comes after GDP stalled in July and underscores the belief the Canadian economy is markedly slowing. Returning to Europe, nine leaders of the breakaway Spanish province Catalonia were jailed Thursday while the ousted president remained in Belgium after the region voted in favour of independence last weekend. Looking ahead, it’s jobs day north and south of the border with employment data released in both countries.

Bay Street Stocks Reach Record Highs

The TSX notched several consecutive record highs this week crossing and staying above the 16,000 pt. threshold. For the four days covered in this report the TSX moved ahead 21 pts. to end at 16,014, the Dow added 82 pts. to close at 23,434, the Nasdaq gained 13 to settle at 6,701 and the S&P 500 fell 2 pts. to finish at 2,579.

Markets Reach New Highs on Improving Fundamentals

Strategy: Global equities, commodities and bond yields trended higher over the past month on encouraging economic data and earnings reports. In particular, manufacturing surveys, GDP data and labour market numbers have remained consistent with a solid pace of economic activity that continues to trigger ongoing upward revisions to growth forecasts. In the ongoing third-quarter reporting season, U.S. earnings and sales results continue to outperform analyst consensus estimates with earnings per share (excl. the insurance sector) growing at a very healthy 7.4% y/y rate, in large part thanks to stellar results from mega-tech companies. Markets have a litany of event risk to manage through over coming weeks including awaiting U.S. President Trump’s nomination of the next Chairperson of the Federal Reserve, Congress introducing a long-awaited tax reform proposal (talk of phasing in corporate tax cuts has weighed on equities recently), a possible ramping up of NAFTA headline risk heading into early 2018 as termination threats linger, etc. Central banks will likely figure prominently as well, with the Fed likely to affirm its intention to hike rates in December while the odds of the Bank of Canada doing the same look to be diminishing following a recent string of weaker data. We stick with our long-held strategy of overweighting equities / underweighting bonds with a bias toward cyclical sector exposure as economic fundamentals remain solid and recession risks for the coming 12 months are quite low.