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.
The month ended with a Sunday night announcement that Canada and the US have reached a tentative deal to overhaul NAFTA and rebrand the new agreement as the United States-Mexico-Canada Agreement – or USMCA. Some highlights to the deal include American farmers receiving better access to Canada’s dairy market, and Canadian consumers being able to purchase five times more foreign merchandise online (without paying more import duty) than they’re currently allowed. There is also a side agreement that will see the Trump Administration guarantee it will not impose tariffs on most auto imports. Canada failed to get the steel and aluminum tariffs lifted for the time being.
The month started off positively between China and the US, with China accepting the US’ invitation to further negotiate an agreement before the next round of tariffs is imposed. However, things took a sharp turn when President Trump instructed aids to go ahead with the tariffs anyway, despite Treasury Secretary Steven Mnuchin’s attempts to restart talks. He also stated that he has another $267 billion in tariffs that are ready to go on short notice if he wanted. China announced retaliatory tariffs on $60 billion of US goods ranging from 5% to 10%.
The news surrounding a revised North American deal is a positive development that will remove trade uncertainty from North American markets. The US will now focus greater efforts on China. As we get closer to a full-bore trade war between the world’s two largest economies, we can expect more developments and threats, which will likely lead to more volatility until a solution is reached. We do believe the end goal is to make global trade more accessible and that a positive outcome can be reached.
The Fed increased short term interest rates by 25 basis points during the month and signaled that there will likely be one more rate increase before the end of 2018. The U.K voted to hold rates steady during the month, citing financial market concerns around Brexit as a key reason to leave the key rate untouched. Brexit is currently scheduled for March 2019. The coming months are set to see talks intensify between London and Brussels as they hammer out terms of Britain’s divorce with the EU.
With interest rates increasing globally we can expect to see an increase in the demand for “risk free” assets and a sell off in lower yield investments from income-oriented investors. The effect of increasing interest rates on equity markets may be limited for the time being due to strong economic activity and earnings. A main driver of risk in equity markets is still the ongoing trade wars.
Throughout the month, a broad agreement was reached between South Korea and North Korea to take steps towards denuclearization, with North Korea promising it would close a key missile test facility. Concerns remain surrounding the sincerity of Kim Jong Un. This deal should lower the level of geopolitical uncertainty from markets.
September also marks the 10-year anniversary of the collapse of Lehman Brothers. This event has completely changed the way that financial institutions evaluate risk and there are still investors who remain cautious and scarred from the event. The S&P certainly has bounced back from Lehman’s collapse and the other market-crushing events of 2008, registering annualized gains of 11.1 percent over the past decade.
Lessons from the event that are still applicable today include: remember your horizon, don’t try and time the market, and diversify, diversify, diversify.