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Monthly Commentary

Despite ongoing political brinkmanship in Washington and the failed efforts by Senate Republicans to pass health care legislation, global equity markets remained resilient in July. Fading hopes for any meaningful stimulus in the US has not been enough to derail the global equity upswing, with investors opting to focus on the favourable global growth backdrop and the corresponding acceleration in corporate earnings, while rising commodity prices have also fueled risk appetite and added to confidence that the world economy is gathering momentum.

August 2017

In July, the US equity market proved immune to political stalemate and breached new highs amid solid earnings results and a weaker greenback, while the Canadian equity market continued to lag its global peers, even despite the resurgence in crude prices. Looking abroad, European equities ended the month virtually unchanged. After rising initially, European stocks pulled back in late July on fears that the surge in the euro would dampen earnings prospects. Finally, emerging market equities were buoyed by the solid macro backdrop in China and the Fed’s gradual approach to policy normalization, both of which have increased the appeal of risky assets.

In fixed income markets, converging central bank policy stances have seen rate differentials between the US and Canada narrow substantially. In the US, bond yields declined amid fading prospects for a US fiscal boost and as investors interpreted the Federal Reserve July statement as dovish in general, focussing on the Fed’s cautious inflation outlook even after reiterating their intension to begin unwinding the balance sheet “relatively soon”. In contrast, Canadian bond yields broke out to the upside after the Bank of Canada made good on its shift to a more hawkish stance and raised interest rates for the first time since 2010, while persistent strength in the economy has bolstered the case for another rate hike later this year.

The theme of US dollar weakness prevailed as investors tempered their expectations for future rate hikes, while political impasse in the US also weighed on the greenback. The Canadian dollar soared higher as economic resilience boosted expectations for another rate hike this year, while the revival in crude prices also lent some support. Similarly, the euro extended gains after the ECB laid the groundwork for an eventual adjustment to its extraordinary policy measures in response to the improved economic outlook in the euro area.

In commodity markets, oil prices rebounded following reports of a massive drawdown in US stockpiles and as Saudi Arabia pledged to restrict oil exports, raising speculation that the global supply glut may finally be easing. Gold advanced as investors weighed the outlook for the US dollar and interest rates after the Fed highlighted its concern about the subdued inflation backdrop, while copper rallied to a two-year high amid fresh optimism on the global economy, particularly in China.

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