Legacy Wealth Weekly - Nov 25, 2016 (New High, Same Narrative)
Penni Johnston-gill - Nov 25, 2016
The S&P/TSX and the S&P 500 rose to new 52-week highs this week, fueled by the same narrative that Trump’s policies will eventually translate to faster economic growth and stronger earnings growth. Though the same policies have pushed the US$ (DXY) t
Weekly Market Wrap-Up: New High, Same Narrative
The S&P/TSX and the S&P 500 rose to new 52-week highs this week, fueled by the same narrative that Trump’s policies will eventually translate to faster economic growth and stronger earnings growth. Though the same policies have pushed the US$ (DXY) to a 15-year high, equity investors seem not concerned taking the view that the US$ drag on economic activity/profitability will be more than offset by fiscal accommodation. Bond investors seem to agree with yields climbing once again. We note that at its high Wednesday, the spread between US and Japanese 10-year bond yields hit 242bps. This is only 13bps short of the highest spread observed since the 2008-09 financial crisis. We believe Japanese bond yields are the anchor for global bonds. As such, the 2.3-2.5% range on US 10-year Treasuries should hold for the balance of the year. Last, despite the US$ strength, commodity prices as measured by the CRB Spot index (~1%) keep roaring higher. Copper ($2.65/lb) has gone parabolic, catching up to bulk commodities such as iron ore, met coal and thermal coal. As we wrote earlier this week, the separation with the US$ is among the reasons why EM assets should prove resilient.
Our focus this week is on the US$ and widespread views that it is headed “3-5%” higher. This is not a gutsy call, since it implies that the euro (~60% of the DXY) goes to parity. But beyond euro parity, what is the US$ outlook? Our Chart of the Week shows that the euro will be undershooting its PPP (1.26) by 21%. Such an undershoot coincided with a secular low on the euro in 2000-02. Otherwise, there are two developments in December which could prop up the euro. First, like the Brexit and US election outcome, no matter the result of the Italian referendum/Austrian elections on December 4, once the uncertainty clears, the euro could re-rate higher. Should the “Italian/Austrian event” fail to spur the euro, the Fed may have to deliver a dovish hike on December 16 to prevent a US$ overshoot, an outcome that global risky assets have not priced-in yet. Our hunch is that December likely triggers a bottoming phase for the euro and European assets.
Regarding economic statistics this week, September retail sales in Canada jumped 0.6% MoM to settle at 2.5% YoY (from 1.9%), a good omen for Q3/16 GDP growth. In the US, durable goods orders registered a 4.8% MoM gain in October owing to a jump in transportation equipment (+12%). Nevertheless, new orders for nondefense capital goods, excluding aircrafts, increased 0.4%, a positive for US economic growth prospects. On housing, existing home sales increased 2% MoM in October to 5.6M units, a level last seen in February 2007. Meanwhile, new home sales declined 1.9% with September sales revised down to 574k units (from 593k). Still, October sales are up a healthy 17.8% YoY. Time will tell how higher mortgage rates will impact housing. Elsewhere, in Europe, flash PMIs improved in November (mfg. at 53.7 and service at 54.1, respectively). We expect the recent Euro depreciation to further boost economic activity and inflation. Finally, in Japan, October exports (-10.3% YoY), imports (-16.5%) and the November flash mfg. PMI (51.1 from 51.4) all disappointed. Admittedly, a weakening Yen is likely to help supporting growth. On the bright side, November headline inflation (Tokyo index) settled at 0.5% YoY (from +0.1%).
Next week, we await final PMIs globally and employment statistics (US and Canada). Else, we will focus on Q3/16 GDP growth in Canada, inflation in Europe, retail sales and industrial production in Japan.
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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