By Dec Mullarkey
Countries like Canada benefit from their trade partnership with the United States. But what if global trade tensions are not resolved by the end of the year?
Read on for technical analysis of financial markets in the second quarter.
Highlights
US-related trade tensions remained a significant macroeconomic concern during the quarter and influenced market sentiment.
Equities posted positive absolute returns, mainly due to subdued inflation, low-interest rates and encouraging corporate earnings.
However, some investors have turned to safe havens like gold, government bonds and currencies like the yen.
Despite the strength of the job market in Canada, oil prices remain a concern, as do consumer debt, productivity and export volumes.
Investors are beginning to take differentiated views of equities across emerging countries. This asset class remained relatively stable despite the difficulties experienced by certain economies (for example, Turkey).
Impact of the trade conflict between the United States and several countries
During the second quarter of 2019, trade tensions between the United States and China, Canada, Mexico and Europe persisted. These trade disputes not only have economic repercussions for the countries affected but also for the rest of the world. These tensions have a dominant effect on the mood of market participants.
The conflict with China goes beyond tariff negotiations and now affects other issues – national security, cybersecurity and the struggle to dominate the new technology sector.
During the last quarter, these disputes significantly impacted world trade. They led to a sharp reduction in capital movements in most major economies and a marked decline in manufacturing activity.
Stock markets are falling but not collapsing.
Risky assets, such as equities, generally performed well during the period. In the United States, the Standard & Poor’s (S&P) 500 index was 1% off its all-time high in April and ended the quarter up 3%. In Canada, the S&P/TSX Composite Index returned 8% in the quarter and around 16% since the start of the year.
Overall, inflation remained subdued, and interest rates remained historically low, allowing equities to tolerate trade tensions better. Equities also benefited from solid earnings generated by most companies seeking to minimize trade disruption.
Negotiations between the United States and China have repeatedly broken down. US President Donald Trump and Chinese President Xi Jinping recently resumed talks, news welcomed by markets. China continues to adopt stimulus measures. The strength of the Chinese economy is essential to global growth, particularly for major trading partners (e.g. European countries).
However, amid escalating trade disputes, exports from Europe and Japan (among others) fell. Surprisingly, the stock markets did not give in to the pressures. For example, the MSCI Europe index gained 1%, and the MSCI Japan index gained 0.4%. Investors seemed to expect conflict resolution and continued accommodative monetary policies by central banks to support the global economy through tough times.
Mixed signals for the Canadian economy
The Canadian economy remains robust thanks to a strong labour market. Volatility in the energy sector remains a concern. However, the price of Western Canadian Select (WCS) oil has jumped around 46% since the start of the year after experiencing sharp declines. WCS crude was trading at around US$43 a barrel at the end of the quarter, as Canada struggled to bring new supply pipelines into service. Brent crude oil and West Texas Intermediate (WTI) oil are trading at a premium to WCS.
Canadian consumers are among the most indebted globally, with a debt-to-income ratio of approximately 178%. This ratio is worrying, but it is gradually decreasing. The Bank of Canada (BoC) continues to reduce the economy’s dependence on consumers and the housing market. With this in mind, Canada has boosted business investment, productivity and exports. The r
