At the close of business last Friday, global equities narrowly advanced in a volatile week of trading to halt a September two-week losing streak. The yield on the benchmark 10-year US Treasury note rose to 1.45% from 1.38% while the price of a barrel of West Texas Intermediate crude oil rose to $73.86 from $72.01. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 18.2 from 20.5, after reaching a high of 28.8 earlier in the week.
We believe we are heading into a period of accelerating economic growth and inflation. In this environment, Canadian equities and commodities should outperform. In addition, US large and small cap equities, gold and high yield bonds should continue to do well. South Korean export growth indicates a strong earnings recovery. Emerging Market equities continue to look attractive
Typical signs of a US recession remains low. Out of seven leading indicators, only one which is inflation, is present at this time. Global purchasing managers index’s continue to show a global manufacturing recovery.
CANADIAN ECONOMIC NEWS
We have a new minority federal government at a $600 million dollar cost to us as taxpayers. That is all I will say about this election.
We expect our central bank to maintain their accommodative policy for now. We also expect to see interest rates begin to move up in the second half of 2022. We expect our loonie to strengthen to between 0.83 and 0.85 cents to the US dollar over the next twelve months.
Here is a staggering statistic. For every $1 dollar of income, Canadians owe $1.70 of debt. Canadians owe 2.16 trillion which as a share of GDP is the highest debt load of the G7 countries.
US ECONOMIC NEWS
Fed reveals new expectations
The US Federal Reserve held benchmark interest rates near zero but indicated rate hikes could be coming sooner than expected, while significantly cutting their economic outlook for this year. The Federal Open Market Committee indicated it will start pulling back on some of the stimulus the central bank has been providing during the financial crisis, but there was no indication when that might happen.
A majority of members now see the first rate hike happening in 2022. In June, when members last released their economic projections, a slight majority pushed that increase into 2023. The committee now sees GDP rising just 5.9% this year, compared with a 7% forecast in June. However, 2023 growth is now set at 3.8%, compared with 3.3% previously and 2.5% in 2023, up one-tenth of a percentage point from the previous forecast. Core inflation is projected to increase 3.7% this year, compared with the previous 3% forecast, 2.3% in 2022 and 2.2% in 2023.
The US economy continues to recover at a healthy pace supported by an economic “rapid open.” Earnings recoveries tend to see a price/earnings contraction on rising earnings and rising inflation. We have seen what I call an orderly valuation contraction in September. Earnings growth remains strong, but will likely moderate in 2022 on margin compression due to rising input costs and wages.
We believe as the Fed starts to taper, the positive impact on equities will be weaker. Markets will likely become more reliant on earnings growth as a driver of returns. We expect the US dollar to continue to weaken against the euro and the loonie. Manufacturing in the US is the strongest we have seen in twenty years.
EUROPEAN ECONOMIC NEWS
Norway’s Norges Bank hiked interest rates to 0.25% from zero, becoming the first major Western central bank to raise rates following the onset of the coronavirus pandemic. The bank said that another hike is likely in December.
The Bank of England kept monetary policy unchanged and downgraded economic growth projections for the third quarter of this year. The central bank changed its expectation for third-quarter UK GDP growth to 2.1%, down from 2.9% at the time of the August report. This downgrade is said to partly reflect the emergence of some supply constraints on output.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
While it is moderating, the Chinese economy remains firmly in expansion mode. Copper prices are signalling strength in the Chinese economy.
Chinese authorities have told local officials to prepare for the potential demise of property developer, Evergrande, the world’s most indebted developer, with liabilities of $300 billion, the Wall Street Journal reported. Local officials described the signals from Chinese authorities as preparations for a potential storm, and said the government told them they should step in only at the last minute to prevent spillover effects from Evergrande’s demise.
Evergrande was due to pay $83 million of interest on Thursday for a $2 billion dollar-denominated bond that is set to mature in March 2022. Dollar bonds are typically held by foreign investors. Even if no payment is made, the company will not technically default unless it fails to make that payment within thirty days. As of Friday morning in Hong Kong, the company had not made any announcement, or any filing to the Hong Kong exchange, leaving investors in limbo.
Challenging week for cryptocurrencies
The price of Bitcoin dropped as much as 10% Monday morning, according to Coin Metrics, as investors began shedding risk amid a global equity markets decline. The price rallied later in the week as the market recovered, only to be dinged again on Friday, when China’s central bank said all cryptocurrency-related activities are illegal and vowed a harsh crackdown.
The People’s Bank of China said services offering trading, order matching, token issuance and derivatives for virtual currencies are strictly prohibited and overseas crypto exchanges providing services in mainland China are also illegal.