To my Clients:
It was an up week for North American stock markets with the Canadian TSX rising 0.9%; the U.S. Dow Jones Index rising 1.6%; and the U.S. S&P 500 rising 1.0%.
With perhaps the heaviest update of the year last week, I’ll moderate things a bit this week. Nonetheless, there are a handful of notable developments to pass along.
First, there has been further softening in the trade dispute (“war” if you prefer) between the U.S. and China. Trump set the tone early in the week when he announced a two week delay to a planned increase in tariffs on $250 billion in Chinese imports. The cited reason was “due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary … on October 1st”. While a two week delay is certainly a welcome de-escalation of tensions, the cited reason has no bearing whatsoever. With face-to-face trade talks rescheduled for early October, gestures of goodwill were necessary to advance negotiations toward an actual agreement. Any excuse would have done. Trump’s was as good as any I suppose.
Further, on Thursday Trump indicated that while he wants a permanent deal with China, he’d “consider” an interim deal as a stepping stone. For its part, China has since indicated it would exempt some soy and pork imports from tariffs. Overall, there has been a notable change in rhetorical tone from both sides. Consistent with my beliefs all along, I continue to think a deal will get done because both sides are motivated to do so. Admittedly, the strength of my conviction has waxed and waned the past several months, but the core belief has maintained.
Also this week, the European Central Bank (ECB) lowered rates further into negative territory by cutting its key deposit rate by 1/10th of a percent to –0.5% overall. It also announced it will restart its quantitative easing (QE) program beginning November 1st. Perhaps the most notable aspect of the ECB’s basket of stimulus measures was its pledge to scrap calendar-based guidance, and to continue rates at “present or lower levels” until inflation “robustly” converges on its goal. Such commentary borders upon a metaphorical “bazooka” of monetary policy support.
Of course, next week sees the U.S. Federal Reserve make a policy announcement of its own. While a cut is universally expected, it is the magnitude of the cut that will be at issue for the markets. And, to be blunt, based upon my reading of various analyst expectations, I think the market will either be disappointed by a 0.25% rate cut, or buoyed by a 0.5% cut. Since the Fed only moves in increments of 0.25%, I don’t think there will be any middle ground (unless the U.S. announces further adjustments to the QE-related runoff of its own balance sheet - unlikely, as well as being a topic for another day). So, in my opinion, next Wednesday (the day of the announcement) will see the markets move materially in one direction or another. While I don’t have a strong view either way (although if forced to guess, I’ll go with 0.50%), I do believe that the announcement will be inconsequential to anything but the short-term outlook. The U.S./China negotiations are far more important to the intermediate and longer-term outlook, and at this stage are almost certainly the key factor determining whether the U.S. economy dips into recession – or not. Whatever the decision next week, the Fed will have many more opportunities to adjust policy subsequent to next week’s meeting.
Overall, imminent recession remains the lesser likelihood in my opinion, and it is not RBC’s “base case” either. As such, portfolios remain very slightly overweight the long-term target for equities identified in each client’s own Investment Policy Statement. But risks are certainly present, and I reiterate my stance from last week – the current environment is tricky. I will, as always, monitor closely and act as appropriate.
That’s it for this week. All the best,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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