Last Week in the markets - Jan 28 - Feb 1, 2019
Stocks jump after U.S. Federal Reserve signals more dovish approach
It was a busy week in geopolitics: Brexit votes, more U.S.-China trade talks and sanctions on Venezuela. But Wednesday's meeting of the U.S. Federal Reserve (the Fed) dominated investors' attention in North American trading. The Fed's statement continued to describe the economy as solid and the labour market as strong, but made it very clear the path to higher interest rates was more than just "paused". The statement said current monetary policy was "appropriate", raising doubts about whether any further rate increases would be needed. It also suggested more flexibility in its balance sheet reduction (quantitative tightening, or QT), and that maybe those actions were nearing an end as well. In both the U.S. and Canada, stocks leaped higher and government bond yields fell. As the U.S. dollar slipped against other major currencies, the Canadian dollar jumped to its highest value since October.
Gains in Canada's S&P/TSX were led by the materials sector. Gold stocks rose as the price of the metal climbed to its highest level in almost eight months, while other miners got a boost from surging iron ore prices, after a deadly dam failure in Brazil forced the world's largest producer, Vale SA, to announce output cuts. Energy stocks benefited from rising crude prices, as the U.S. announced sanctions targeting Venezuelan oil. The health care sector also posted strong gains, lifted by the ever-volatile cannabis stocks. The industrials sector led the decliners. Engineering and construction firm SNC-Lavalin Group saw its stock price plunge after warning that problem contracts and diplomatic tensions between Canada and Saudi Arabia were hurting results.
The S&P 500 took its directional cue from the Fed statement. Renewed hopes of a U.S.-China trade deal also lifted sentiment, while corporate earnings reports added even more fuel to the fire. Positive results and more confident outlooks from Apple, Boeing, General Electric, and Facebook were especially helpful. Overall so far this earnings season, year-over-year growth has slowed from last year's remarkable pace, as expected, but the percentage of positive surprises is slightly higher than normal. Now that the partial government shutdown has ended, some of the economic data releases that were delayed are beginning to trickle out. Among them was a surprising robust home sales number for November. The Conference Board's Consumer Confidence Index fell in January, but given the government shutdown and December's stock market volatility, the drop is not surprising. Other so-called "soft data", including the ISM Purchasing Managers Index and the University of Michigan Sentiment Index, suggest the recent gloom has already started to fade. Friday's strong employment report, well above expectations, showed the labour market remains in a low-inflation sweet spot.
European and Asian markets were mixed, focusing more on local developments, than on the U.S. Fed outlook. Stocks in the U.K. gained after parliament voted to renegotiate Brexit (even though the European Union quickly responded that the deal agreed to with Prime Minister Theresa May is not open to renegotiation). French stocks rose after France reported better than expected fourth quarter GDP growth. Other markets, including Germany and Italy, retreated as economic news suggested softer growth.
What's ahead next week:
Canada
- International merchandise trade (December)
- Building permits (December)
- Housing starts (January)
- Employment report (January)
U.S.
Note: Due to the recent partial U.S. government shutdown, many economic releases scheduled in recent weeks have not yet been published. Some of the releases scheduled for next week and listed below may also be delayed.
- Factory and durable goods orders (November and December)
- Personal income and spending (December)
- Gross Domestic Product (Fourth quarter)
- Markit Purchasing Managers Indices (January)
- Retail sales (December)
- Housing starts and building permits (December)
- New home sales (December)
- Trade balance (November)
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David J. McGoey, Consultant
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