Legacy Wealth Weekly - Sept 9, 2016 (EM Team Rescue)

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Weekly Market Wrap-Up: EM Team Rescue

Though market volatility has been abnormally low this summer, Fridays have not. Just as markets seemed ready to move higher, today’s pullback has brought indexes back into their trading ranges. Admittedly, before today, stocks had been resilient given the deluge of weak economic data (more below). However, with bond yields breaking above key resistances, investors may be adjusting their positioning to allow for probabilities of an unpriced Fed hike this fall following today's cautious comments from bond guru Jeff Gundlach and several Fed governors. Our lower valuation band on US 10-year Treasuries is at 1.9%. Oil enjoyed a ~4% lift this week on the back of reports that Saudi Arabia and Russia reached an agreement on stabilizing the oil market. Also, crude stocks fell sharply by 14.5M barrels. It was the biggest fall since 1999, as tropical storm Hermine led to lower imports. Interestingly, despite higher oil prices and a decent jobs report in Canada, the CDN$ could not get a bid this week. The culprit is the BoC, which delivered very cautious remarks and explicitly cited the Vancouver housing market as a potential financial vulnerability down the road.

Our focus this week is on emerging economies’ performance. With August mfg. and service PMIs reported, it has become very clear that interest rate cuts observed this year are bearing fruit. Indeed, as our Chart of the Week shows, composite PMIs have been very strong this summer among BRICs, especially in Russia and India. We have been writing intensively about the need for global reflation to shift from developed (DMs) to emerging markets (EMs) in order to support/lift global growth. We said that a weak US$ was a pre-requisite to perform this transition. We said that the ECB and BoJ would deliberately refrain from adding stimulus in order to weaken the US$. Ditto for the Fed, which would drag its feet. The G20 meeting in March was a game changer. This is when, we believe, DM central bankers agreed to cap the US$ to allow EMs to accelerate the pace of reflation. Since then, we have seen more than 50 rate cuts. With EM real policy rates ~2%, more reflation is in the pipeline.

Regarding economic statistics this week, in Canada, employment rebounded in August with a 26.2k print. That compares with a loss of 31.2k jobs in July. However, the decline in self-employed (39.1k), the stagnation of private sector jobs growth (+8.3k) and strong public sector employment (+57.0k) all advocate the labour market is less buoyant than the headline number suggests. That said, the BoC left its benchmark rate unchanged, confident that stronger growth lies ahead. In the US, the ISM service index deteriorated to 51.4 (from 55.5). In combination with the weakening in the Fed Labor Market Conditions Index (-0.7 from +1.3), the door seems to be closing for a September Fed hike. Elsewhere, in Europe, the ECB left its key rates and QE program unchanged. Meanwhile, the service PMI for the Eurozone came in at 52.8 (from 52.9) but retail sales registered a 1.1% MoM increase in July and the August retail PMI (51 from 48.9) points to further strength. In China, the Caixin service PMI advanced to 52.1 (from 51.7), exports improved to -2.8% YoY (from -4.4%) and imports jumped into positive territory (+1.5% YoY, from -12.5%). Also, inflation cooled materially in August (1.3% YoY, from 1.8%) owing to lower pork prices, a positive for consumers, and producer prices improved (-0.8% YoY from -1.7%), a positive for businesses. Last, in India, the service PMI settled at 54.7 (from 51.9).

Next week, we will focus on the US NFIB, industrial production, producer prices, consumer prices and retail sales. In China, we await industrial production, retail sales and fixed asset investments.

The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.


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