To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 2.5%; the U.S. Dow Jones Index up 3.0%; and the U.S. S&P 500 up 2.8%.
After two consecutive weekly updates (August 16th and August 23rd) of deeper than usual comments, this week’s update will be somewhat lighter as I wish all clients a great upcoming long weekend.
Obviously, U.S. and China (indeed, global) trade concerns remain front and centre when it comes to handicapping the probability of recession. RBC published an interesting piece this morning suggesting that, regardless of the trade outcome, investors should prepare themselves for a secular period of Sino/U.S. tensions as China continues to assert itself ever more forcefully on the world stage - politically, economically, technologically, militarily etc. From time to time, these tensions will have repercussions on the investment markets, again, regardless of what happens on the trade front.
More topically, RBC is of the view that predicting an end/outcome to the trade tensions is difficult, but suggests that a realistic best case outcome would be a cosmetic deal that strikes an accord on some issues, but would be far from “the” definitive act when it comes to future trade relations.
Myself, I have long asserted that I personally believe a deal of some sort will get done before the 2020 U.S. Presidential elections, so I find myself mostly in agreement with RBC’s stance. My quibble would be that I think such an outcome would be the likely scenario, rather than the “best case” scenario. I continue to think that both sides to the standoff will be motivated to get a deal done, despite some mainstream media commentary noting that China, owing to its one party system, can take a much longer approach to resolving the matter than the U.S. which is beholden to the four-year election cycle. While this is true, I’d point out that there are also personal ambitions at play, and President Xi might face growing challenges to his personal power base if he leads China too deeply down the path of economic slowdown. In fact, I’ve seen suggestions that this might be a gambit by other ambitious members of China’s elite looking to undermine Xi’s authority.
The preceding being said, there was some softening on the trade front this week as face-to-face discussions appear to be back on again, and China stepped back from its own tariff threat while asserting it would like to resolve the dispute through “calm dialogue”. Notwithstanding the fact that Trump is prone to anything but “calm” dialogue, the markets were receptive to this improved tenor and had a strong up week as the quoted returns in my customary first sentence reveal.
Last week I noted that the continued softening in global economic data “should not be excessively rationalized”. I remain of this view. Yield curves of developed countries worldwide are now all in inversion. Despite my belief that said inversions are at least partially resultant of the better part of a decade of quantitative easing and other highly stimulative central bank machinations, the rope is short to reduce client equity exposure for the fourth time this past year. I’m still not there yet as other economic indicators we track (notably weekly jobless claims and credit creation metrics) do not yet confirm the yield curve signal, and the highly charged U.S./China trade standoff could flip sentiment for the better on a moments notice. Improved trade sentiment might well also be the antidote to the self-fulfilling-prophecy scenario which posits that the fear of a recession itself leads to recession. As always, I’ll monitor events attentively and act as appropriate.
That’s it for this week. Again, a good long weekend to all.
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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