Nov 14, 2019

Plus ça Change, Plus C’est La Même Chose

In October, equity and bond markets tipped and turned in response to news headlines reporting on the ongoing China-U.S. trade talks and Brexit sagas. In the end, markets were largely unchanged. What does that mean for the economy and what do we recommend in response?

Are Chinese-U.S. trade talks progressing? Are they getting worse? Is Brexit settled? Is it going to be continually delayed? During the month, news headlines flashed the latest tips and turns in sentiment while equity and bond markets tipped and turned in response. By the end of October, the U.S. equity market was up 2.0% and the Canadian equity market was down 1.1%. Also swinging and swaying was the U.S. and Canadian yield curves but, when all was said and done, they were largely unchanged. While the ride continues to be a bumpy one, we have seen this story line before.

Exemplified by our headline this month, first coined by a French journalist in 1849, the saying still rings true today — “the more things change, the more they stay the same”.

At the end of October, the U.S. Federal Reserve (the Fed) treated investors to another rate cut. The Fed telegraphed that it is very close to the end of its cutting regime with the market anticipating one or possibly two more cuts by the end of 2020. On the same day, there were no tricks from the Bank of Canada (BoC) as they held Canadian interest rates steady, exactly as the market was expecting. At this time, the Bank of Canada is expected to remain in pause mode for all of 2020.

 

To no one’s surprise, the Canadian federal election ended with a minority government. Based on the results, we anticipate continued (and possibly accelerated) government spending from this administration. While with a minority government, history suggests we could be going back to the polls within 2 years, this fiscal outlay could produce a small boost to the economy in the short term. Of course, all those deficits eventually have to be paid, and there may be some long-term pain in store. Fiscal policy means there will be even less pressure for the BoC to provide stimulus through interest rate cuts.

 

Depending on how you read this current Canadian government, their view on the energy industry can be seen as sitting somewhere between antipathy and apathy. Regardless, opportunities in the Canadian oil patch are likely to be found primarily in the larger, more stable names. Due in large part to this sentiment, there has been some rumbling in the press about a Western separation. We believe this will not amount to anything more than just that—rumblings. In the East, the Bloc Quebecois increased their representation in Parliament. However, with the Liberals being able to lean on the support of the NDP, the Bloc representation is unlikely to be able to garner much special treatment for Quebec.

 

Across the pond, Mario Draghi bids adieu as he leaves his post as President of the European Central Bank (ECB). His tenure at the bank will be remembered as a time when Europe did not collapse under its various crises, but also as a time when Europe failed to stage any kind of significant recovery. Outside of the U.K., European equity markets showed reasonable gains during the month of October. As we have discussed in previous months, negative interest rates in Europe will not be disappearing any time soon, and European banks are struggling to find innovative ways to deal with this thorny issue. We expect to see more European banks charging clients to keep deposits on their books.

 

We have also written many times about the yield curve inversion in the U.S. and its use as a potential indicator of a recession. On October 10th, the 10-year rate crept back above the 3-month rate, reversing the prolonged inversion. Over the following days, the gap widened to as much as 0.19%, closing the month at +0.17%. Is this an “all-clear” signal? We believe this should be considered as a relief of some negative pressure rather than a true positive outlook. We continue to be concerned that the predictive value of this traditional signal has been muddied by years of substantial central bank intervention.

 

As the end of the year approaches, we expect headlines to continue to reflect changing sentiment on various international affairs. While the markets will likely continue to shift to-and-fro in relation to this changing sentiment, we still foresee a slowing but growing economy. Our overall asset mix remains slightly underweight equities as we move through this uncertainty. While unease is becoming an increasingly familiar feeling, we remain fixated on the horizon and encourage our clients to stay focused on their long-term goals.