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.
November was certainly a roller coaster ride for global financial markets, dropping further into correction territory before closing higher by month-end.
US markets breathed a sigh of relief in November when Fed Chair Jerome Powell made comments hinting at a slowdown in the pace of future interest rate hikes and citing that current levels are close to a neutral level. This helped US markets as they ended the month in the green up 4.2% in CAD terms. Investors appear to be conflicted as corporate and economic fundamentals have been strong throughout the 3rd quarter, while headlines of slowing growth and volatile geopolitical relationships stoke fears of a correction.
Mr. Powell’s comments combined with optimism around the meeting of President Trump and President Xi Jinping had spillover effects and helped produce positive returns in global markets – including Canada. Emerging markets led the charge, fueled by a bounce in Chinese markets.
At the time of this writing, the US and China agreed to a trade truce over a 90-day period following their meeting at the G20 summit while they re-open the dialogue and look to negotiate a trade deal. However, large issues remain concerning intellectual property rights and technology transfers. These larger issues – combined with a recent twitter rant where Mr. Trump referred to himself as the Tariff Man – are leading market participants to believe that a deal won’t be reached over that window. Until there is a clear end in sight for this trade war, we expect higher than normal volatility. However, it is ultimately in everyone’s best interest that cooler heads prevail so we expect this pressure to highly influence the outcome.
On November 30th CUSMA was signed jointly by the leaders of Canada, Mexico, and the US to replace the old NAFTA. The countries now have six months for lawmakers to approve and adopt the new standards. There are concerns that the split government in the US could end up derailing the deal all together during this time.
Looking forward we will be watching closely as Prime Minister Theresa May will try and pass a Brexit deal in front of the House of Commons in a key vote during December.
Volatility was certainly present in November as seen by examining the CBOE Volatility Index (VIX) which closed around 21 at month's end. Fears are being fueled by media headlines such as news concerning trade wars, falling oil prices, peak earnings, and FBI investigations into the 2016 campaign to name a few. For context during the sovereign eurozone crisis of 2010-2012 VIX levels were well above 30 and peaking around 45.
Our outlook remains very much the same. We expect volatility to persist fueled by geopolitical events. As always, we will continue to monitor market developments as they occur.
Following last month’s volatility and the continued volatility that we expect, it is important to not let fear dictate your investment decision-making. During times where you may feel overwhelmed it is a good idea to reduce your media intake and to sleep on it before making any snap decisions.
Enjoy your holiday season and substitute your business news consumption with some of your seasonal classics.