Market Commentary

In June, investors attempted to reconcile some encouraging signs of global economic strength with heightened trade tensions and some hawkish undertones from several major central banks - all of which added to financial market volatility during the month. The global trade dispute intensified after President Trump’s ramped-up protectionist threats were swiftly met with vows for retaliation from America’s closest allies – all but threatening to derail the strongest global expansion since 2011. Meanwhile, central banks are slowly stepping away from the proverbial punchbowl. The Federal Reserve raised interest rates in June and adopted a more aggressive path to future normalization, while the European Central Bank announced that its asset purchase program will come to a close in 2018 after several years of balance sheet expansion.

JULY 2018

Global equity markets posted some mixed results in June. North American indices led the way, with the S&P 500 posting its third consecutive monthly advance, while US small cap stocks jumped to new record levels. And despite stalled-out NAFTA negotiations, the S&P/TSX hit an all-time high in late June – thanks to an impressive comeback in the energy space. In contrast, European bourses stumbled after President Trump threatened to impose tariffs on European car imports, while emerging market stocks plummeted alongside the mounting trade rift between Washington and Beijing, while higher US interest rates also spurred outflows from developing-nation assets.

In fixed income markets, the US 10 year treasury yield was virtually unchanged in June as investors gauged some conflicting forces at hand. While lingering trade uncertainties have weighed on sentiment and sent investors flocking to the safety of US treasuries, the resurgence in crude prices and some encouraging signs of life on the inflation front helped to place a floor under bond yields. Meanwhile, the short-end of the curve backed-up as market expectations converged towards the Federal Reserve’s accelerated path to policy normalization. Finally, corporate spreads widened as appetite for risk soured in the environment of heightened geopolitical anxieties - though high yield outperformed on the back of a recovery in the energy sector.

In currency markets, the greenback advanced versus its G10 peers and capped its best quarter since 2016. Notably, the euro declined even after the ECB announced an end to its asset purchase program later this year. Instead, the central bank managed to soften its stance somewhat and conveyed that interest rates will remain unchanged until the back-half of 2019. Meanwhile, the yen retreated after the Bank of Japan downgraded its inflation assessment and reiterated that the end of ultra-stimulative support is nowhere in sight. Finally, brewing trade tensions and widening interest rate differentials versus the US weighed on the Canadian dollar, while the Chinese yuan tumbled on concerns of capital flight and speculation for easier central bank policy should a full-blown trade war come to fruition.

In commodity markets, crude prices blew through the $70-mark in late June as shrinking stockpiles and supply disruptions from Venezuela, Libya, and Canada compounded the anticipated plunge in Iranian production – which threatens to restrain global supplies at a time when global demand remains resilient. In contrast, gold prices retreated alongside the stronger US dollar, while copper got caught up in the US-China trade debacle and capped its largest monthly loss since March.