As on trend for 2018, geopolitical events dominated market movement throughout November. The Democrats took control of the House and the Republicans gained on their majority in the Senate. As a result, it is unlikely that Republicans will be able to extend their fiscal stimulus as a method to further grow the economy.
After three quarters of mostly slow and steady growth, October saw a correction in global financial markets with volatility doubling from its September levels. The S&P 500 fell by 6.8%, emerging markets were down 5.7% in CAD terms, while Canada was the biggest loser down 7.4%. Despite the risk averse sentiment, fixed income markets were also down by month end due to rising interest rates.
In this month’s market update we discuss September’s global economic and market highlights, which includes an update on financial markets, the global trade situation, the developing narrative in emerging markets, and a particularly interesting 10-year anniversary of note.
Throughout September, we saw developed markets end the month on a positive note. Specifically, the Dow and S&P 500 set new highs, the Nikkei closed at its highest level since February, and global developed markets, including Canada closed even higher. On the other hand, emerging markets posted a negative month due to ongoing trade and credit concerns, as did the bond market with central banks continuing to raise interest rates.
This month we’re discussing what drove markets throughout August, including signs of strength in the US market, slow-progressing trade negotiations, and news out of emerging market economies.
US economic reports released in July showed increasing strength, breaking past the 2% real growth rate which has been somewhat of a norm since 2009. Real growth is up 2.8% in the past year, while real GDP growth in the second quarter alone grew at 4.1% annual rate which is its fastest pace since 2014. Wages and salaries are growing at its fastest pace in nearly a decade and, as a result, consumption numbers are also solid. The strong economic data can be attributed to tax cuts and increased government spending.
The story of June 2018 in the markets has been dominated by headlines surrounding global trade tensions. Other themes persist throughout the market such as rising interest rates, geopolitical uncertainty, and volatility in the financial markets.
In May we saw geopolitical risks continue to loom large and add to the volatility in global equity markets. Specifically, in the Eurozone. Italy is having difficulties forming a government and the rise of populist anti-euro parties are gaining momentum. This is causing concerns that Italy may leave the Euro and is adding more uncertainty to European markets.