The week in the markets - September 13, 2021


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Equities slide on growth fears

Most global equity markets slumped on the week, with Japanese (see chart for more) and Chinese equities bucking the trend. Bond yields were slightly higher, extending the slow climb off the mid-August lows. Canadian yields outpaced their US counterparts on the solid Canadian jobs report. Chinese equities managed to gain on robust Chinese trade data despite the government continuing to tighten regulations, especially on large internet companies (like Tencent). The latest moves target the video game industry and includes a temporary freeze on approvals for all new online games. The energy sector was the lone positive sector in Canada, helping the TSX post one of the smaller losses globally. Once again, thank China, oil prices rose on news of authorities releasing supply from China’s strategic oil reserves (an unprecedented intervention). The move was made to ease the pressure of rising prices and suggests demand is strong and is viewed as a precursor to ramping up purchases later.

A variety of concerns drove the equity market checkback. Fears that the delta variant is impairing growth, especially its impact on the supply-side of the global economy and inflation. Second, a few central banks continue to tip-toe toward tighter monetary policy conditions. Last, in the US, cracks are forming in the Democratic Party over their spending proposals, raising concerns over how large and how quickly a budget can be passed and what tax changes may come to pay for it.

On the central bank front, there were slight changes in language from the US Federal Reserve’s Beige Book survey of the economy that highlighted the growth and supply-side fears. The latest report downgraded the assessment of the economy to “economic growth downshifted slightly to a moderate pace.” The report cited curbed consumer behaviour due to the delta variant alongside supply chain issues and difficulty finding labour—this echoes similar complaints from other surveys like the ISM Purchasing Manager Survey.

The European Central Bank (ECB) decided unanimously to keep buying bonds but at a “moderately lower pace.” President Lagarde stressed during the press conference that this is not tapering. The pace of purchases will ease, but the total amount pledged remains at €1.85 trillion and remains scheduled to run until at least the end of March 2022.

The Bank of Canada (BoC), for its part, made no changes to policy but did change their language around inflation. The Bank’s statement once again highlighted “base-year effects, gasoline prices, and pandemic-related bottlenecks” are pushing inflation higher. The BoC’s assessment of inflation is that these “are expected to be transitory”; inserting the word “expected” versus “are transitory” back in July - subtle but a whiff of concern. In a speech, Governor Macklem downplayed the addition of the word “expected.” The BoC is widely expected to continue its tapering in October (cutting bond purchases (QE) from $2 billion to $1 billion). Governor Macklem stressed that cutting QE is not tightening. However, attention naturally turns to the ongoing size of the bank’s balance sheet once they’ve finished cutting purchases (if you’re no longer adding bonds, the balance sheet shrinks if you don’t reinvest the maturing bonds). Here, Macklem said the move toward eventual reinvestment is contingent on the economy and inflation outlook, but “our first move will be to raise the target for the overnight rate.” Bond market pricing currently pegs the first rate hike at 0.25% in July of 2022. This clarifies that the BoC will be buying bonds for some time, and the balance sheet will not initially be a tightening instrument as reinvestment will likely continue beyond the first rate hike.

 

The week ahead

  • Canadian housing data
  • Chinese fixed asset investment data
  •  Japanese and Eurozone trade data
  • UK employment data
  • Globally: retail sales, inflation and industrial production data

This weeks market closing value - Week ending September 10th

EQUITY INDICES Level Change 1-week YTD 1-year 5-year
      CAD CAD CAD CAD
S&P/TSX 20,633.06 -188.37 -0.90% 18.35% 27.48% 7.25%
S&P 500 4,458.58 -76.85 -0.38% 18.40% 28.46% 15.30%
DJIA 34,607.72 -761.37 -0.84% 12.78% 20.92% 13.23%
FTSE 100 7,029.20 -109.15 -0.35% 9.73% 21.78% 1.03%
CAC 40 6,663.77 -26.22 0.36% 15.78% 27.59% 8.70%
DAX 15,609.81 -171.39 -0.34% 9.75% 13.68% 8.59%
Nikkei 30,381.84 1,253.73 5.49% 3.71% 21.47% 10.23%
Hang Seng 26,205.91 303.92 2.44% -4.39% 3.34% 1.08%
CURRENCY RETURNS CAD Change 1-week YTD 1-year 5-year
US$ 1.2692 0.0168 1.34% -0.26% -3.79% -0.55%
Euro 1.4994 0.0112 0.75% -3.55% -3.81% 0.45%
Yen 0.0115 0.0001 1.13% -6.31% -7.10% -1.89%
CANADIAN TREASURIES Yield Change COMMODITIES USD Change
3-month 0.15 0.00 Oil $69.72 $0.43
5-year 0.83 0.04 Gold $1,787.58 -$40.15
10-year 1.24 0.05 Natural Gas $4.94 $0.23