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Monthly Commentary

As 2017 came to a close, the global macroeconomic backdrop continued to impress, with investors thriving on the lucrative combination of synchronous global growth, robust corporate earnings, and a generally supportive central bank backdrop. Furthermore, after several months of deliberation, President Trump signed the Tax Cuts and Jobs Act in late-December, with the added stimulus expected to bolster the global economic and earnings backdrop in 2018. This reflationary impulse has fueled widespread gains across most major asset classes, including equities, bonds, foreign currencies, and commodities.

January 2018

Global equity markets remained resilient and posted broad-based gains in December. The S&P 500 breached a number of new milestones throughout the year and posted its strongest annual gain since 2003, thanks to the robust economic backdrop, solid corporate earnings, and speculation for fiscal expansion. Meanwhile, the S&P/TSX also moved higher amid an impressive resurgence in crude prices in the back-half of the year, though lagged its global peers on an annual basis. Looking abroad, emerging market stocks once again led the performance charge in December and posted their best annual gain since 2009, as the weaker greenback enhanced the allure of risker assets in the developing world.

The US yield curve finished 2017 near its flattest levels in a decade. The relentless flattening has come on the heels of some stubbornly subdued inflationary pressures that have weighed on longer-maturity bond yields, while expectations for central bank policy normalization in 2018 has buoyed the front-end of the curve. Indeed, while several central banks upgraded their growth forecasts for 2018 and have reinforced the notion that ultra-stimulative monetary policies are no longer a necessity, they have left unchanged their inflation forecasts all at once. Meanwhile, the strengthening global economic backdrop has stoked demand for corporate bonds, with the spread on investment-grade debt falling to levels not seen since before the global financial crisis.

The US dollar retreated in December and posted its first annual loss since 2012 – even after the Federal Reserve raised rates for the third time in 2017 and as the Trump administration adopted tax reform. Instead, several major central banks have converged with the Fed in adopting a more constructive policy stance in response to above-trend growth, dimming the appeal of the greenback. Notably, the euro topped $1.20, while the loonie rallied on the back of stronger crude prices and as healthy economic and inflation results boosted wagers for Bank of Canada rate hikes in the new year.

Finally, crude prices held above $60/barrel owing to stronger global demand and dwindling stockpiles, with the Energy Information Agency reporting that US stockpiles reached their lowest level in almost three years. Meanwhile, gold advanced as the sharp decline in the US dollar fueled demand for alternative assets, while copper prices rose to a fouryear high as ongoing signs of global economic resilience augmented demand prospects for the red metal.

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