After hitting fresh new highs last week, stocks have taken a breather, with the TSX and S&P 500 down a fraction this week. Energy share prices continued their drop on concerns over increasing supply and weak demand, with the price of oil slumping to a two-year low this week. Commodities have been weak, with oil, copper and gold prices bearing the brunt of further US Dollar strength. The DXY (US Dollar currency index) has now risen for nine consecutive weeks and the index is currently testing the long-held 84-85 resistance.
However, market action has turned to bonds where yields continued their upward climb that began last week. It does feel like US bonds are losing the US Dollar magnet and reacting to mid-cycle pressures. Indeed, despite the rally in US 10-year treasuries in August, the 5-year maturity, which is more sensitive to the business cycle, has been range bound. This morning, strong US retail sales catapulted US 5-year bond yields above the 1.81% resistance. US 10-year Treasuries have risen roughly 70bps so far today and they are up roughly 140bps for the week. Time will tell whether this is another false start or yields have staged a sustained turnaround. From a technical perspective, history suggests the latter. Just as in summer 2005 when the 100-week average on US 5-year bond yield pushed above the 200-week average, the crossover signalled higher yields. This same dynamic is currently operating with the crossover being observed both on the 5 and 10-year maturities. Obviously, higher bond yields add much comfort to the view that weak commodity prices lately do not signal a global growth relapse.
Much consideration has been given to the possibility of a market correction at the heels of the current long-standing rally. It remains to be seen whether the overbought and bullish trend will translate into a price correction. Ken Fisher, of Fisher Investments, wrote in his latest Stock Market Outlook that “each new market high meets disbelief and fear of heights – in our view, a sign investors have yet to embrace optimism, leaving abundant room for sentiment improvement ahead. That, with a stunning midterm political backdrop, should push stocks higher in the second half, creating a back-end-loaded, up-a-lot year.” So, while we feel that increasing our cash over the last few months has been prudent, and note that September and October have historically shown softness, we are still confident that the markets have more to give for the balance of the year.
Regarding economic statistics this week, in Canada, new home price inflation stalled in July. A lateral/time correction in home prices seems underway as supply remains abundant while demand remains constrained by elevated household debt levels. Speaking of debt, in the US, consumer credit soared in Q2/14 ($26B from $18.8B), driven notably by demand for new cars which also boosted retail sales in August (+0.6% Month over Month vs. +0.3% excluding autos). U.S. consumer sentiment rose in September to its highest level in over a year on more upbeat views on the domestic economy in the coming year. Richard Curtin, who led a University of Michigan survey on the matter, said “although consumers anticipated a slowdown in employment growth, they expected the highest rate of growth in their wages in six years.” So, while this doesn’t directly indicate any economic changes, when the world’s largest economy has an increasingly positive sentiment, we look at this favourably.
In Europe, the weak euro seems to be translating into stronger exports, as evidenced by the improved trade balance in Germany and France. Industrial production is also benefitting from euro depreciation rebounding +2.2% Year over Year.
Elsewhere, the Chinese trade balance reached a new all-time high in August, as exports (+9.4% Year over Year) benefitted from an improving US (+11.4%) and European (+12.1%) demand backdrop. However, imports unexpectedly dropped (-2.4%) owing to subdued demand for commodities. While Chinese authorities have shied away from lowering interest rates and reserve requirement ratios for banks so far, faltering inflation (down to 2% Year over Year from 2.3%) could allow for more aggressive measures. Speaking of reflation, elsewhere in Emerging Markets, a mix of slowing inflation (7.8% from 8%) and manufacturing activity (-1% Year over Year) in India is also opening the door for both monetary and fiscal stimulus.
For those of you who live in Vancouver, the city has recently been ranked 4th healthiest city in the world by CNN. So what makes Vancouver a healthy city? For starters, there is a strong public transit network (despite what many Vancouverites will say), a very walkable downtown, and major initiative to implement bike lanes. In addition, our great air quality, abundant access to nature, and over 30 km of seawall all help propel Vancouver as a prime city for the health conscious individual.
In keeping with the health theme, last weekend was the RBC Gran Fondo Whistler, a 122 KM bike race along the Sea-to-Sky from Vancouver to Whistler. There were nearly 3,000 participants and the race was won by Steve Gaffney with a time of 3:36:40. Congratulations to our own Erik Dekker and Mark Hewett who both successfully completed the race. Well done lads!
Thank you for your trust.
As always, we welcome any feedback. Have a great weekend.
The Dekker Hewett Group