Global Equities Stage Comeback
At the close of business last Friday, global equities were up on the week, supported by a report that inflation eased to 8.5% in July, down from 9.1% in June. The yield on the US 10-year Treasury note rose to 2.85% from 2.83% a week ago, and the price of a barrel of West Texas Intermediate crude oil rose to $92, up from $88 last Friday. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 19.2.
Global equities have staged a comeback in recent weeks despite signs of slowing global growth and the fear of recession in Europe. The MSCI All Country World Index is up nearly 10% since midyear, with US technology stocks leading the charge. At the same time, the OECD index of leading economic indicators predicts slowing growth across member countries, and the US yield curve inversion has deepened. Yield curve inversion occurs when shorter-term rates rise above longer-term ones.
Crypto regulations closing in
I’ve often been asked about investing in crypto. My reply has always been that the industry needs a lot more regulation before I would invest in crypto and if I wouldn’t buy it, why would I recommend it to a client? After a dramatic meltdown across cryptocurrencies in the first two quarters that more than halved the value of the cryptocurrency market, the SEC in the US is considering new reporting rules for hedge funds that would require greater disclosure of their exposure to cryptocurrencies. Momentum for more robust cryptocurrency regulations increased after the hedge fund Three Arrows Capital crashed this summer. The shuttering of the fund created a chain reaction across the crypto industry, resulting in frozen customer funds and platform closures. The US Department of the Treasury imposed sanctions on Tornado Cash, a so-called “mixer” platform designed to hide cryptocurrency transactions and owners.
CANADIAN ECONOMIC NEWS
What is the FHSA?
This is the new First Home Savings Account and here is how it will work:
- It gives prospective first-time homebuyers the ability to save $40.000.00 towards a home purchase. A first-time buyer includes someone who has not owned a home in the last four years.
- You can contribute up to $8000.00 per year and the contribution is tax-deductible, like an RRSP. The contribution and the growth of the investment is tax-free if used to buy a home. The contribution must be made in the calendar year to be tax deductible IE: no 1st 60 days.
- The account can run for 15 years and you must be 18 years old to open a FHSA.
- You can carry forward unused contributions up to a maximum of $8000.00.
- To withdraw funds from the FHSA, you must have a written agreement to buy or build before October 1st of the year following the withdrawal.
- If you don’t end up buying, you can transfer your FHSA to your RRSP on a tax-free basis.
- You will also be able to transfer funds from your RRSP to the FHSA subject to the annual $8000.00 limit. These transfers are not tax deductible.
- You also cannot do a spousal contribution to an FHSA.
- You can also name your spouse a “Successor Owner.” In the event of your death, the surviving spouse then automatically becomes the owner of the plan.
- The current home buyers plan that allows you to withdraw $35,000.00 from your RRSP for a 1st-time homebuyer purchase will continue to be available but you cannot use both plans for your purchase.
US ECONOMIC NEWS
With about 90% of the constituents of the S&P 500 Index having reported for Q2 2022, blended earnings per share show that earnings growth is running at 6.7%, with the energy sector reporting the highest growth rate at 299%, earnings are on track to contract 3.7%.
Inflation slowed in July
The US Consumer Price Index increased by 8.5% in July on a year-over-year basis, lower than expectations of 8.7%. Lower energy prices contributed to the decline while food and shelter prices remained high. Lower inflation eased investor concerns that the US Federal Reserve would need to hike rates more aggressively to mitigate runaway inflation. While risk assets rose on the news, an 8.5% inflation rate remains considerably higher than the Fed’s target of 2%, and tightening through the end of the year is widely expected.
Consumer sentiment rises on improved outlook
US consumer sentiment, which had been on the decline, rose to a three-month high as energy prices eased. The University of Michigan sentiment index rose to 55.1 from 51.5, exceeding most economists’ forecasts. Consumer inflation expectations fell for the year ahead, and the overall outlook improved. The importance of a strong consumer is difficult to overstate given that consumer spending comprises nearly 70% of US nominal GDP.
Biden to sign Inflation Reduction Act
US President Joe Biden has signed the $700 billion Inflation Reduction Act. This is seen as a victory for Democrats as the midterm elections draw closer. The spending program invests in green energy, lowers some health care costs, and increases the size of the IRS. During late negotiations, policymakers added a 1% excise tax on buybacks and a 15% minimum tax on large corporations. Republicans criticised the bill as unnecessary during a period of high inflation, saying it would do little to help middle- and lower-income Americans.
EUROPEAN ECONOMIC NEWS
The UK economy contracted for the first time since the pandemic, as household spending softened. Raging inflation and slowing growth is an unfortunate economic mix for a country that has struggled to recover from the effects of the coronavirus.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China’s property market continues to cool as construction slows in both residential and commercial properties. Stocks of Chinese builders remain under pressure, losing $55 billion in value in 2022.
On Tuesday, the Taiwanese military conducted exercises to simulate a defense against an invasion by China. While the drills were part of an annual exercise, they come at a time of increased tension between Taiwan and China after US congressional leader Nancy Pelosi’s visit to the island last week.
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