Market Report

Spike in oil prices and a Fed rate cut, but stock and bond markets (mostly) yawn

Most major stock markets ended the week close to where they started it, despite heightened geopolitical risk, an interest rate cut from the U.S. Federal Reserve (the Fed), and a global growth forecast cut from the Organization for Economic Cooperation and Development (OECD) that now projects the global economy to grow at the slowest pace since the 2008 financial crisis. Adding to the relative calm was a notable absence of antagonistic trade talk from either the U.S. or China, as both parties appear to be avoiding escalation prior to China’s 70th anniversary of Communist Party rule on October 1. U.S. President Donald Trump’s reminder on Friday that he wasn’t interested in a “partial deal” and a Chinese delegation’s cancelled farm visit tipped U.S. markets into the red to end the week.

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An attack on oil production and processing facilities in Saudi Arabia last weekend, that disrupted over 5% of global supply, initially saw crude prices surge roughly 20%. But a U.S. promise to release oil from its Strategic Petroleum Reserve, and a Saudi projection that its facilities would be fully operational by the end of the month, eased prices well off their reactionary highs. West Texas Intermediate crude finished the week less than 7% higher. Energy stocks posted strong gains, and the increase in regional tensions will likely support prices for an extended period, but most other equity sectors barely reacted. In the muted flight-to-safety, gold prices moved slightly higher and bond yields in Canada and the U.S. declined ten to 15 basis points for most maturities.

Reaction to a widely-anticipated 25-basis point rate cut from the Fed was similarly minor and short-lived. Comments by the Fed were first thought to be a bit less dovish than expected, sending stocks slightly lower. But markets quickly reversed course as Fed Chair Jerome Powell suggested at the following press conference that at least one more rate cut can be expected unless risks improve.

Canada’s S&P/TSX Composite Index, lifted by gains in the energy sector, outperformed other developed markets and climbed to a new all-time high. Higher gold prices lifted the materials sector, and declining bond yields boosted interest-rate sensitive utilities and real estate. The health care sector led decliners, as once again regulatory concerns weighed on the cannabis stocks. The S&P 500 finished the week with a loss. The consumer discretionary sector led the decline, while advancers were led by utilities, real estate, and energy. Economic data releases in both Canada and the U.S. were mostly better than expected, easing recession concerns.

European stock markets were mixed. Italian stocks fell after former Prime Minister Matteo Renzi quit the Democratic Party to form his own group. Although he still supports the recently formed coalition government, there are fears the move could eventually trigger a new election. U.K. stocks declined as the October 31 Brexit day approaches without any sign of an imminent breakthrough in negotiations. Japanese stocks advanced after an announcement that the U.S. and Japan could enter into some sort of trade agreement with a few weeks. A further boost came from speculation after the Bank of Japan’s policy meeting that an easing could come at the next meeting. Stocks in Hong Kong and Shanghai retreated amidst continued protests in Hong Kong, and weak retail sales and industrial production data from China.

In other news

The BDYI global shipping index is sitting at 2,131 , a very good # and indicates that global growth is still expanding. The VIX index is sitting 15.32 and that indicates the market is considered fairly priced, not too cheap or too expensive. The cheapest gas in Saskatchewan is 97.9 at the Costco in Saskatoon and the most expensive is 119.9 at Fas Gas in Gravelbourge and the ESSO in Saltcoats and Morse. The cheapest gas in Manitoba is 102.7 at Domo and Husky in Winnipeg and the most expensive is 124.0 at the Esso in Flin Flon. The WTI oil price is 58.09 which is up on the week but dropped from it’s high of $63 on Monday.

I guess the quote this week should reflect the importance of planning:

If you do not know where you are going you will end up somewhere else. - Yogi Berra, former New York Yankee catcher

What’s ahead next week:

Canada

  • Wholesale trade sales (July)

U.S.

  • Market Purchasing Managers Indices (September)
  • Conference Board Consumer Confidence Index (September)
  • New home sales (August)
  • Gross Domestic Product (2nd Quarter Revised)
  • Wholesale inventories (August)
  • Personal income and spending (August)
  • Durable goods orders (August)
  • University of Michigan Consumer Sentiment Index (September)
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