Happy Days Are Here Again!

Financial markets commentary Aug. 14-20

North American equity markets are up 2 percent as geopolitical tensions ease and the focus turns to encouraging economic data and expectations of a "dovish" Janet Yellen.
Happy Days Are Here Again!
Rahul Vaidyanath

North American equity markets are up 2 percent as geopolitical tensions ease and the focus turns to encouraging economic data and expectations of a "dovish" Janet Yellen. Meanwhile, it's more of the same for the Eurozone—economic growth hurt by the Russia-Ukraine conflict. 

Financial markets were taking their direction earlier in the period from headlines regarding Russia and Ukraine, but as the period wore on, central banks took on more importance, with markets generally calm in anticipation of minutes from the July 29-30 Fed meeting and Jackson Hole.

What's worrisome for the Eurozone is the German GDP contracting in the second quarter—before economic sanctions were imposed on Russia. France's GDP showed no growth in Q2, while Italy had already fallen back into recession. The German 10-year bund now yields below 1 percent and the country's stock market index, the DAX, is down 2.5 percent year-to-date.

On this side of the Atlantic, equity markets are at or near all-time highs yet again. The S&P 500 closed just 0.07 percent off its all-time high, while the NASDAQ closed at a 14.5-year high. U.S. equities have shown tremendous resilience in the face of geopolitical threats.

By now, over 90 percent of S&P 500 companies have reported second quarter earnings and slightly more than two-thirds of them have beaten expectations, which is a bit better than what's typical, according to analysis from Reuters. 

And it's not just companies buying back shares and "inflating" earnings per share. Revenue and earnings growth has been strong, especially in the health care and energy sectors. Mergers and acquisitions activity is also boosting U.S. equity markets.

The U.S. economy got some good news with strong housing starts numbers and benign inflation that sits at 2 percent. Behind it all is, of course, a dovish Fed.

In Canada, the TSX is at an all-time high, although bond yields didn't move as high as in the U.S. The Canadian dollar also moved lower versus the U.S. dollar despite a temporary gain after Statistics Canada revised its July jobs report on Aug. 15. The new figures paint a much rosier picture of the Canadian labor market than the erroneous figure of a week earlier.

Finally, the Fed minutes elicited different reactions from the equity and bond markets. While stocks rallied after the release of the minutes, bonds sold off. Allianz chief economic adviser Mohamed El-Erian, formerly CEO of PIMCO, commented in an interview on CNBC that the minutes are "more 'hawkish' than consensus expectations," implying interest rates will rise sooner and faster than what is currently perceived.

He went on to point out that the labor market had moved closer to a more normal level. "If labor compensation moves in the next few employment reports then there will be a change in the view of the interest rate paradigm," El-Erian said. 

Now the attention shifts to the Jackson Hole symposium where central bankers gather annually for an academic forum. It was at the symposium during the financial crisis that former Fed chair Ben Bernanke used his speech to unveil quantitative easing plans, creating expectations for discussions on monetary policy.

In light of this, market participants will be keenly listening for clues on the path of policy rates from Yellen and further details on the timing and scope of the quantitative easing program from European Central Bank president Mario Draghi.

Changes in Key Financial Market Variables

  13-Aug 20-Aug Change
TSX 15,262.73 15,561.95 2.0%
CAD/USD 0.9159 0.9112 -0.5%
Cdn 2yr yield 1.07% 1.09% 0.02%
Cdn 5yr yield 1.53% 1.56% 0.03%
Cdn 10yr yield 2.08% 2.10% 0.02%
S&P 500 1,946.72 1,986.51 2.0%
Dow 16,651.80 16,979.13 2.0%
Nasdaq 4,434.13 4,526.48 2.1%
US 2yr yield 0.42% 0.48% 0.06%
US 5yr yield 1.58% 1.64% 0.06%
US 10yr yield 2.42% 2.43% 0.01%
Oil 97.39 93.48 -4.0%
Gold 1,312.20 1,288.40 -1.8%
VIX 12.9 11.78 -8.7%
Rahul Vaidyanath is a journalist with The Epoch Times in Ottawa. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.