Market Commentary

While investors digested generally upbeat corporate earnings results, mixed signals on the health of the global economy, and the resumption of US-China trade talks, central banks were front and centre in July.  As widely expected, the Federal Reserve took out some “insurance” in order to sustain the expansion and cut interest rates at month-end, while the European Central Bank laid the groundwork for further stimulative measures in the fall.  Meanwhile, the Bank of England stepped-back from its hiking bias as newly-minted PM Boris Johnson began preparations for a no-deal Brexit.  And on the trade front, tensions receded somewhat as US and Chinese policymakers headed back to the negotiating tables after a two-month hiatus.

August 2019

Global equity markets remained well-supported in the environment of accommodative monetary policy, while hopes for progress on the trade front also buoyed sentiment. The US equity market led the charge and breached new highs in July, while the Canadian market also eked out a marginal gain. Looking abroad, European and Japanese bourses welcomed pledges for support from their respective central banks, though a gloomy growth and earnings backdrop weighed somewhat. Finally, emerging market stocks traded in a tight range as investors contemplated the murky global growth landscape, which wasn’t enough to counter optimism on the trajectory for Federal Reserve policy and the resumption of US-Sino trade talks.

While the prospect for a synchronous central bank easing cycle reinvigorated the bond rally in early-July, bond yields edged higher throughout most of the month as signs of economic resilience in the US brought into question just how much stimulus is required going forward. As such, investors reigned-in their expectations for the magnitude of rate cuts at the July FOMC gathering. Heading into the meeting, the market was fully-discounting a 25 basis point rate cut and only a 20% chance of a 50 basis point rate cut. The yield curve bear-flattened, with the biggest upward move taking place in the shorter end of the curve, while the 10-year treasury yield also backed-up, though by a lesser extent.

The US dollar advanced thanks to the string of robust economic results that saw investors reconsider their expectations for an overly-aggressive easing path. In contrast, the euro declined as the ECB set the stage for rate cuts and a resumption of asset purchases this fall, while the pound pierced multi-year lows on speculation that UK Prime Minister (and Brexit hardliner) Boris Johnson will opt for a no-deal exit from the EU.

Gold held above $1400/oz owing to dovish-leaning rhetoric from major central banks and the corresponding decline in real rates, while upward momentum was amplified further by mounting geopolitical angst. Oil prices slumped amid renewed concerns about global demand prospects, which largely overshadowed the potential for supply disruption stemming from simmering tensions in the Middle East. Finally, copper prices ended the month virtually unchanged as traders weighed a cooling global demand backdrop against the prospect for an amicable trade accord between the world’s two largest consumers of the red metal.