Stocks edged higher in the U.S. following gains in Europe and Asia as the panic surrounding a potential trade war showed signs of easing. Treasury yields edged higher as the dollar steadied and oil rallied. The S&P 500 Index and Stoxx Europe 600 both broke three-day losing streaks. Canada's benchmark equity gauge touched a record and emerging-market stocks, which have been hit hard by the trade concern, rose the most in two weeks. Oil jumped ahead of an OPEC gathering. The pound erased a drop to edge higher before a key Brexit vote. A sense of calm is returning to markets after President Donald Trump stepped up trade threats against China earlier in the week, proposing moves that economists reckon could cut as much as half a percentage point from the Asian nation's growth. Traders may well be siding with Goldman Sachs Chief Executive Officer Lloyd Blankfein, who characterized the escalation in rhetoric as simply a negotiating strategy.
Investors dumped riskier assets as a trade dispute between the world's two largest economies showed signs of deepening and accelerating. Stocks dropped, Treasuries rallied and the dollar climbed with the yen. The S&P 500 fell for a third day after losses across Europe and Asia, where Chinese shares plunged after reopening following a holiday. President Donald Trump threatened tariffs on another $200 billion of Chinese goods, and the Asian nation pledged retaliation. The euro dropped after the latest dovish message from the European Central Bank, and the pound weakened as the U.K. prepared for another knife-edge Brexit vote Wednesday.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
The USD was the top performer this week as volatility remained elevated. The CAD looked poised to be the top-performer after the USD saw broad declines on Wednesday and the 1.3030 – 1.3050 levels continued to stall USD advances. However the trend abruptly changed and the CAD was the worst performing currency behind the EURO over Thursday and Friday. Although USDCAD closed last week near 1.2920, the pairing gapped higher to open this week near 1.30 after trade tensions escalated between Canada and U.S. over the weekend. The pairing tested the 1.3040 level on Monday, Tuesday, and again on Wednesday after the U.S. Fed raised its key interest rate to 2.00% as was widely expected. The Fed's projections and accompanying statement were a bit more optimistic or hawkish, and that sent the USD broadly higher from 1.2970 up to 1.3050. The move was short-lived and USDCAD fell right back towards 1.2980 as the broad USD gains quickly evaporated. Early Thursday morning, the European Central bank (ECB) issued its policy announcement. Although rates were expected to remain at 0%, there was speculation that they would announce the end of the asset purchase / quantitative easing program (a more hawkish tone). EURCAD spiked to 1.5360 before tumbling to 1.5120 as the accompanying statement and press conference painted a different picture. The ECB was far more dovish than expected catching the market off-guard. There were concerns over the economic outlook while the elimination of the QE program was not a 100% given - it would be tied to incoming data. The USD was broadly bid on the news and better than expected U.S. retail sales data lifted the USD further. USDCAD effectively broke above the 1.3050 level and extended gains just beyond 1.3100. On Friday, the combined escalation of U.S. and China trade tensions along with a 4% decline in oil prices (from a weekly high to a weekly low) saw USDCAD move up towards 1.3209 – a 1 year high.
Yesterday, USDCAD initially dipped from 1.2980 down to 1.2949 before surging to 1.3109. The main catalyst for the broadly stronger USD was a dovish European Central Bank that saw the EUR decline by 3 cents within a 12 hour period. The uptrend has continued today with USDCAD touching 1.3200 – a 1 year high. Equity markets and commodities are trending lower today as the U.S. / China trade war escalates with the U.S. announcement of 25% tariffs on up to $50 billion of Chinese goods and China threatening to retaliate. The USD index (DXY) surged yesterday and hit 1 year highs in early Asian trade. However with the announcement of the tariffs, the USD has broadly weakened. (with the exception of the commodity bloc (AUD / CAD / NZD)
U.S. equities opened higher, following European stocks, after the ECB delivered a somewhat dovish message to investors who had been reeling from disappointing China data and the Fed's hawkish shift. The S&P 500 Index rose Thursday morning, led by consumer and technology shares. The dollar hit a seven-month high and 10-year Treasury yields tightened. The Stoxx Europe 600 Index climbed after the region's central bank held interest rates and signaled in a statement stimulus may last until the end of the year and rates will remain steady until at least the summer of 2019. The euro slumped and government bonds rallied.
U.S. equities edged higher ahead of Wednesday's Federal Reserve rate decision, while European stocks also gained. The USD slipped as benchmark Treasury yields held steady, and emerging-market currencies extended a drop. With the Fed is all but certain to raise rates by a quarter-point at the close of a two-day meeting Wednesday, the focus is on the outlook for future policy. An uptick in inflation has reignited some speculation there could be a total of four hikes in 2018. The European Central Bank will decide rates on Thursday -- no change is expected but investors will be braced for news on a potential end to the region's quantitative-easing program. The GBP weakened as Brexit battles rumbled on and inflation held steady. Italian bonds gained as the country's debt sale had strong demand. Earlier in Asia, Japanese shares rose as the yen dipped, while equities fell in Hong Kong and Australia. Chinese shares also retreated, with ZTE Corp plunging by its daily limit after it agreed to a $1 billion fine. Turkey's lira posted the largest decline among emerging market currencies as polls pointed to a close-run election.
The meeting between President Donald Trump and Kim Jong Un was met with a collective shrug by global markets, which appear to be more fixated on a host of macro events and data due in a few days. The S&P 500 Index rose slightly early Tuesday, while the Dow Jones Industrial Average slipped and yields on 10-year Treasuries pushed closer to the 3 percent threshold. Safe-haven assets edged lower as Trump and Kim signed a document pledging to work toward peace on the Korean peninsula. There was never much prospect of the summit triggering a large market reaction, except perhaps in the event of a shock outcome. A seemingly certain Federal Reserve rate increase on Wednesday, plus the prospect of a hawkish European Central Bank tilt on Thursday, tease far more concrete developments for traders. Tuesday's U.S. inflation figures -- which were in line with estimates -- may even reignite the four-hikes-in-2018 debate ahead of the Fed's decision.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
The CAD was extremely volatile for the 2nd straight week. Trade concerns and weak oil prices (near 2 month lows) saw USDCAD initially climb from 1.2950 up to 1.3069 – breaking above the previous week's high of 1.3042 and within striking distance of 1.3125 – the 2018 high. The trend changed abruptly Wednesday as U.S. Treasury Secretary Mnuchin reportedly urged President Trump to exempt Canada from the steel and aluminum tariffs. Oil prices surged 3%, bouncing back from 2 month lows while Canada's trade deficit narrowed more than expected. USDCAD dropped from 1.2957 down to 1.2857 accordingly. The trend abruptly changed again with USDCAD climbing back up towards 1.2930 late Wednesday. On Friday, weaker than expected Canadian jobs data (the 2nd consecutive month of job losses) saw USDCAD move up to 1.3042. However the data was overshadowed by very strong wage growth in Canada and optimism over the upcoming G7 Summit. The move above 1.30 was quickly erased with USDCAD closing the week at session lows – 1.2920/25. The EURO was the best performing currency last week on speculation that the European Central Bank (ECB) would signal the end of its quantitative easing program at its upcoming meeting. EURUSD rebounded from 11 month lows while EURCAD climbed from 5 month lows to trade near 1 month highs. The USD and the JPY were the worst performing currencies.
U.S. equities retreated from early highs while European stocks rose as investors eased into a hectic week, during which three major central banks set interest rates, President Donald Trump meets North Korea's leader and Brexit returns to the fore. In Europe, the mood was cautiously risk-on, with the Stoxx Europe 600 Index rising for the first time in five days and core European bonds slipping. The euro strengthened and Italian bonds and stocks jumped after the country's new finance minister confirmed his commitment to the common currency. The pound fell in what could be a key week for Theresa May's Brexit strategy, and as data showed a slump in U.K. manufacturing. The Federal Reserve is expected to raise interest rates Wednesday, while European Central Bank officials are poised to hold formal talks on ending its bond-buying program Thursday. The Bank of Japan meets Friday, with no change to policy expected.
Yesterday, USDCAD climbed to 1.2969 before falling to 1.2933. The pairing then climbed to 1.30 before easing back to 1.2970 in late trade. Overnight, risk aversion flows took USDCAD up to 1.3030 before falling back to 1.2980 ahead of the Canadian employment report. The headline data missed estimates resulting in a quick spike to 1.3042. However wage growth was much higher than expected sending USDCAD down to 1.2970. A couple of subsequent rallies stalled just over 1.30 and the pairing has since fallen to session lows at 1.2949. North American markets have recovered the bulk of overnight losses as the G7 Summit gets underway. The CAD has also recovered earlier losses and is now the best performing currency on the day.
The S&P 500 nudged higher as U.S. equity markets fought to maintain the momentum from a record-breaking rally in tech shares. The euro gained for a fourth day. The Stoxx Europe 600 Index gave up its advance as the euro strengthened again and after disappointing data on euro-area exports and German factory orders. The common currency rose amid talk of an end to the European Central Bank's quantitative easing program. Earlier, shares rose from Tokyo to Sydney in the wake of another record finish for the Nasdaq, but gains in the gauge stalled on Thursday. The dollar slipped, while the Turkish lira jumped after the central bank raised interest rates by more than expected.
China and the U.S. are continuing to try to knock together a trade deal ahead of a deadline later this month that would see the imposition of tariffs on Chinese imports to America should no accord be reached. Coal miners, farmers and drillers would be the main beneficiaries of an offer by Beijing to boost purchases of U.S. goods by about $25B this year. On the America side, the Trump administration is putting the finishing touches on a deal which should allow ZTE Corp to resume operations. Although the White House insists the ZTE agreement and trade talks are separate issues, China made easing the ZTE sanctions a pre-condition for engaging in the trade discussions. Next week's European Central Bank monetary policy meeting in Riga, Latvia will discuss the timing of the end of the bank's quantitative easing program, according to euro-area officials familiar with the matter. An assessment would have to be made on whether progress has been sufficient to warrant a gradual unwinding of asset purchases, ECB Chief Economist Peter Praet said this morning. Overnight, the MSCI Asia Pacific Index rose 0.4 percent, while Japan's Topix index closed 0.2 percent higher, a fifth consecutive daily gain, spurred by the weaker yen. In Europe, the Stoxx 600 Index was 0.2 percent higher, with Italian stocks the only major drag on the region. S&P 500 futures pointed to a gain at the open.
The global rally in risk assets that sent U.S. stocks to a 12-week high sputtered on Tuesday, with the S&P 500 struggling to push higher. Treasuries rose while Italian bonds fell. The outlook for global equities has taken an upward turn in recent sessions, not least because stronger-than-expected data from the U.S. showed the world's largest economy is in rude health. It's a relief to investors after weeks of turmoil, though with President Donald Trump stepping up his aggressive trade policies and populists poised to start governing in Italy, there remain plenty of reasons for caution.
Yesterday, in a 2nd consecutive volatile day, USDCAD initially declined from 1.2880 down to 1.2816 – an 8 session low before surging to 1.2990 – almost completely erasing Wednesday's down-move from 1.3040 to 1.2835. The pairing would eventually ease back towards 1.2950 in late trade. USDCAD dipped to 1.2930 overnight before climbing to 1.2981 ahead of the U.S. jobs report. The USD broadly strengthened ahead of the employment report after U.S. president Trump signaled a good report in an earlier tweet. Overall, the data was good and USDCAD popped quickly up to 1.3007 before falling to 1.2955 on subsequent USD weakness. The pairing has since bounced to test the 1.2985 level a few times before falling to session lows near 1.2945.
Canada's economic growth rate trailed forecasts in the first quarter on the weakest household spending in three years and slower business investment. Gross domestic product expanded at a 1.3 percent annualized pace in the January to March period, the slowest in almost two years. The expansion trailed the lowest estimate in a Bloomberg economist survey where the consensus was for a slight acceleration from the fourth quarter to 1.8 percent. Further bad news followed as the White House Slaped Metal Tariffs on Europe, Canada and Mexico.
Bank of Canada left interest rates on hold for a 3rd straight decision this morning but gave an upbeat assessment of the economy and removed some of its more cautious language, potentially indicating a greater willingness to return to a hiking cycle. In its announcement, which kept the benchmark rate unchanged at 1.25%, the central bank said continued growth in the economy further reinforces the view that higher interest rates will be warranted. Crucially, policy makers removed language that had appeared in the five most recent statements about remaining cautious on any future policy adjustments, replacing it with a pledge to take a gradual approach. They also dropped another line about the need to keep some monetary accommodation in place over time. Also absent was any reference to labour slack. After the announcement this morning the USD/CAD dropped from 1.30 to 1.2850.
Stocks declined, while Treasuries and the dollar rallied as the escalating political crisis in Italy engulfed markets. The S&P 500 Index dropped for a third session, following the biggest decline since March in the Stoxx Europe 600 Index, as Italian political turmoil lead to gridlock and set the course for another election. The flight from risk began in Italy's bonds, with its 10-year yield spiking, leading the euro to slide against the dollar. That sent investors fleeing to safer assets, sending the Treasury benchmark yield below 2.9 percent and the yen rising.