Weekly Market Wrap-Up: Breakout
After an 18-month pause, the S&P 500 and the Dow Jones Industrials have pushed to all-time highs this week. Notwithstanding three other Fed members saying that there is no hurry to raise rates owing to UK/EU uncertainties, the expectation that further monetary stimulus is coming from the BoE and the BoJ, coupled with relatively upbeat Q2 earnings reports, are among factors behind this week’s rally. Unsurprisingly, bond yields have borne the brunt of the equity rally, rising 20bps from their lows. As we showed in Wednesday wire, US 10-year Treasury bond yields are likely headed back to the lower bound of their historical valuation range at 1.9%. Otherwise, consistent with increased risk appetite, copper enjoyed its best week since early March, rising ~6%. To tell the truth, global economic data have also improved lately, with the G10 economic surprise index rising to its highest level in 18 months. Conversely, gold bullion dropped ~2% as investors liquidated safe-haven investments. Unsurprisingly, bond proxies such as telecoms and utilities had a difficult week as well. With the spread between the S&P 500 forward P/E ratio and the CBOE VIX rising above “4” this week, a pullback could occur at any time. Should bond proxies fail to catch a bid, a higher price range for US equities could be confirmed.
Our focus this week is on emerging markets (EMs). Earlier this week, the OECD published its set of country leading economic indicators (LEIs), and once again LEIs point to a shift in relative economic momentum towards EMs. As our Chart of the Week shows, LEIs are validating the outperformance of EM bonds and stocks so far this year. We expect this leadership to persist, considering that EM currencies, bonds (EMLC-US) and stocks (EEM-US) remain the cheapest risk assets around. Regarding EM stocks, most investors still believe that EMs are a play on rising commodity prices. Not anymore! Over the past five years, the index weight as shifted away from resources (from 22% to 12%) to financials (from 25% to 33%). To the extent that undervalued financials provide market leadership to global equities, this bodes well for EM equities and, by ricochet, EM proxies such as the S&P/TSX.
Regarding economic statistics this week, in Canada, the BoC left its benchmark rate unchanged. The central bank lowered its growth forecasts but cited the strength of the US economy and a weaker CDN$ as positive factors for non-energy exports. That said, nominal and real manufacturing sales disappointed in May (-1% and -2.1% MoM respectively), led by a decline in motor vehicle sales (-4.2%). In the US, higher energy commodity prices kept headline inflation unchanged at 1% YoY but core inflation accelerated to 2.3% (from 2.2%). Ditto for producer prices, up 0.5% MoM and 0.3% YoY (from -0.1%). No wonder inflation expectations and bond yields are on the rise. Meanwhile, retail sales improved 0.6% MoM in June (vs. 0.1% exp), supported by building material, garden equipment & supplies dealers, gasoline stations and non-store retailers. On the supply side, the NFIB (94.5, from 93.8) and industrial and manufacturing production also beat expectations (+0.6% and +0.4% MoM). In China, GDP growth (6.7%), retail sales (10.6%) and industrial production (6.2%) all positively surprised markets. Conversely, exports (-4.8% YoY), imports (-8.4%) and fixed asset investment (-9%) disappointed. That said, there is room left for further monetary/fiscal policy accommodation with inflation slowing to 1.9% YoY in June (from 2%).
Next week, aside from flash PMI releases globally, in Canada, inflation and retail sales are on deck. In the US, our focus will be on housing statistics. Finally, we await the ECB interest rate decision.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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