Investors cheer reduction of tensions on multiple fronts

Global equity markets climbed in a holiday-shortened week that saw a flurry of news about lessening geopolitical risks. Most notably, stocks surged and safe haven assets retreated after reports that U.S. and Chinese officials plan to hold a new round of trade negotiations in October. In Europe, markets were buoyed by the formalization of a new political coalition in Italy that is expected to be more conciliatory toward the European Union, and by a series of defeats for U.K. Prime Minister Boris Johnson in the British Parliament, lowering the risk of a no-deal Brexit. And in Hong Kong, the territory’s Chief Executive Carrie Lam announced the formal withdrawal of the extradition bill that had sparked three months of protests.

The rally in Canada’s S&P/TSX Composite Index lagged most other major markets but brought the equity benchmark to within half a percent of its all-time high, set in April. Perhaps some of the lack of enthusiasm can be attributed to the Bank of Canada which, in keeping its overnight lending rate unchanged this week, remained less inclined than other central banks to move to a more stimulative monetary policy. The Bank’s statement highlighted the rising risks from global trade tensions, which keeps the door open to an October interest rate cut, but sounded less accommodating than the market expected. As a result, Canadian government bond yields climbed relative to their U.S. counterparts, which in turn were higher due to the subsiding of economic fears. A strong jobs report Friday reinforced the view that the Bank will remain on the sidelines. The relatively light-weight health care sector posted the biggest absolute gain in the TSX, but the energy and financials sectors provided the biggest overall boosts. Oil stocks gained as crude prices climbed in reaction to new U.S. sanctions on Iran and the reduction in trade tensions – which reduces the risk to economic growth and oil demand. The financials advanced in response to rising interest rates, which tends to help bank profitability. The materials sector was the only TSX sector to lose significant ground, after the selling of haven assets pulled the price of gold down from its recent six-year high.

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Every sector of the S&P 500 advanced as investors focused on news of the planned trade talks rather than on the mixed economic data releases. U.S. factory activity, as reflected in the Institute for Supply Management’s purchasing managers index (PMI), contracted in August for the first time in three years. But the PMI for the services sector, which accounts for a far bigger piece of the economy than manufacturing, accelerated and remains in solid expansion territory. Although job gains came in at the low end of expectations in Friday’s employment report, which supports expectations for a U.S. Federal Reserve rate cut in two weeks, most employment statistics continue to signal a healthy labour market.

All major stock markets in Europe and Asia moved higher. Italy led gains in Europe following the formation of its aforementioned EU-friendly government. U.K. stocks underperformed as surveys showed manufacturing and construction in deep downturns and the economy heading toward recession. Asian markets were led by Hong Kong and Shanghai following the de-escalation of protests and trade tensions, respectively. But an August collapse in Hong Kong’s PMI shows the protests have had a significant impact on its economy.

What’s ahead next week:

Canada
• Housing starts (August)
• Building permits (July)
• New Housing Price Index (July)

U.S.
• Consumer and Producer Price Indices (August)
• Wholesale inventories (July)
• Import and Export Price Indices (August)
• Retail sales (August)
• Univ. of Michigan Sentiment Index (Sept.)

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