To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 1.2%; the U.S. Dow Jones Index finishing down 3.0%; and the U.S. S&P 500 finishing down 2.6%.

This week concludes a poor month for the markets. However, it follows an exceptionally strong first quarter of 2019 (though, hereto, this followed a very poor close to 2018). Normally, some sort of pause and give back would be expected after such a strong stretch as Q1 2019, and this remains my, and RBC’s, base case for what is currently transpiring in markets. However, that being said, there is no doubt that trade worries are beginning to escalate to overtly concerning levels. In the past 24 hours President Trump has announced the U.S. intention to impose 5% tariffs on all Mexican imports into the U.S. beginning June 10th, and to raise these tariffs by 5% per month to a maximum rate of 25% until such time as Mexico effectively stems the flow of illegal migrants entering the U.S. through the Mexican border. The cynic in me thinks the timing of this announcement is awfully convenient for President Trump in light of the recent comments by Robert Mueller who stated that had there been clear evidence that President Trump DID NOT obstruct justice, he “would have said so” in his official report. This statement was reverberating through Washington and dominating the news cycle. Now, a day later, not so much. Less cynically, everyone knows that immigration has been a key policy concern of Trump’s, and that the issue resonates with his base of support. So this move might be a legitimate move to accomplish his stated agenda goal, when the alternative pledge of a wall keeps encountering roadblocks. Regardless of the motive, the announcement caught the markets by surprise, and certainly bring into question Trump’s trustworthiness when it comes to honoring deals such as the recently negotiated United States-Mexico-Canada Agreement on trade. Chinese leaders might legitimately be wondering why they should continue to negotiate if Trump might be inclined to set aside any trade pact for whatever arbitrary reason he brings to the fore.

In sympathy with the above, 10 year interest rates have declined further, and the yield curve is again inverted, and more so than it was a couple of months ago upon its initial inversion. However, in the grand scheme, the inversion is still rather shallow, and not all parts of the curve are inverted (i.e. the widely watched 2-year/10-year portion remains positively sloped, as is the 3-month/30-year portion). Further, the jobs market continues to flash a very strong “all clear” signal. So, for now, I’ll continue to treat the recent market weakness in line with the base case scenario outlined above - as a natural pause in an otherwise up-trending market. But the leash is short, and it would not take much further deterioration in the yield curve, or some other negative economic development for me to take make another defensive equity reduction in client portfolios. But I’m holding off for the time being, recognizing that a) Trump meets with Chinese President Xi late next month and perhaps trade negotiations can get back on track; and b) the U.S. Federal Reserve might be “forced” (per Goldman Sachs) to cut short term interest rates in the very near future. Either outcome would be immediately positive for the markets.

That’s it for this week. All the best,

Nick

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
Toll Free: 1.844.665.9900 │ nick.scholte@rbc.com

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