This week in the markets - January 14-18, 2019

January 18, 2019

Stocks rise amid hopeful signals of trade progress

North American equities moved decisively higher Friday on signs of easing U.S.-China trade tensions, to end an otherwise mostly uneventful week. Until Friday's reports, developments on the trade and central bank fronts were tame compared to recent weeks - even a dramatic defeat in Britain's parliament of Prime Minister Theresa May's Brexit deal failed to bother investors. Economic data continued to weaken globally, and especially in China, but pledges by Chinese government officials of further tax cuts and other stimulus measures seemed to reassure markets. Meanwhile in the U.S., the ongoing partial government shutdown - now the longest in the country's history - has resulted in a relative dearth of economic readings for investors to react to.

Canada's S&P/TSX Composite Index has now advanced for 11 straight sessions. The benchmark saw its biggest gains in the health care and financials sectors, lifted by cannabis company shares and better banking stock sentiment south of the border, respectively. Energy stocks advanced with improving crude prices and a shrinking of the price difference between Canadian and U.S. oil, in response to recent government efforts to limit supply. Chinese government promises of support for growth boosted companies in the technology and industrials sectors, particularly to those that have been hurt by trade war concerns. The materials sector was the only TSX sector to lose ground. The group is still struggling near two and a half year lows, even in a week that saw Canada's Goldcorp announce it is being acquired by Newmont Mining in a $10 billion deal.

Gains in the S&P 500 were clearly led by financials, after strong earnings were reported by Bank of America, Goldman Sachs Group, and others. The utilities sector stood out on the downside, where PG&E shares plunged more than 50% after the company said it will file for bankruptcy. The electric utility has lost more than 85% of its value since November, when it was blamed for California's deadliest and most destructive wildfire on record. As S&P 500 earnings releases for the fourth quarter of 2018 get underway, current estimates from analysts suggest year-over-year growth of more than 12% - a healthy pace, but a significant slowdown from growth levels reported last year. Economic data, in short supply due to the partial government shutdown, has generally pointed to a small slowdown in activity. But some reports, including the Philadelphia Fed Business Outlook Survey, and labour market measures such as initial unemployment claims, have been surprisingly strong.

Most major European and Asian markets rose, but underperformed the U.S. and Canada. The U.S. was reported to again be considering auto tariffs on the European Union. This is considered an escalation of trade tensions between the two parties, after the EU said it would not consider removing trade barriers on agricultural products. Stocks in the U.K. underperformed as the proposed Brexit agreement went down to defeat. The setback was widely anticipated, but there is no clear path forward from here for Brexit, or for the U.K. government. In Asian markets, where investors are, so far, focusing optimistically on China's government actions to boost confidence and growth, economic data suggests deeper concern could be warranted. Last week full year auto sales were reported down in 2018 for the first time in 18 years. And this week's trade data showed imports in China plunging almost 8% year-over-year.

What's ahead next week:

Canada

• Retail and wholesale trade sales (November)

U.S.

Note: Due to the 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.

• New and existing home sales (December)
• Markit purchasing managers indices (January)
• Conference Board Leading Index (December)
• Durable goods orders (December)

David J. McGoey, Consultant

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