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073018 Weekly Global Equities Strategy Update

Short-term political concerns remain elevated. Issues include proposed US tariffs against Chinese goods valued at $500 BN stalled NAFTA negotiations, and the ramp up of US mid-term election political rhetoric

 

Stocks are trading slightly lower at the start of the week, with all eyes on foreign central banks and ongoing trade negotiations around the world ahead of a keenly awaited policy announcement from the Bank of England later in the week. Investor sentiment is hampered by the prospect of three major interest rate policy decisions this week; Bank of Japan (Tue, 4am, rate expected unchanged, but stimulus policy could be tweaked), Fed (Weds, 7pm, no change expected) and the Bank of England (Thurs, 12pm, rate hike expected).

US economic focuses this week are on the FOMC announcement on the Fed Fund rate on Wednesday and the July Employment report on Friday. We think for the coming weeks, yields for the 10-Year are capped at the flag's implied target of 3.14%, the highest level since mid-2011, implying a much faster pace of tightening, how might that affect equities?

We still believe that investors should reevaluate their current holdings, and pay close attention to the seasonal forces that likely will come into play in the short term.  We are advising investors to invest along the seasonal trends:

 

• Buy US treasuries (10-Y’s and 30-Y’s)
• Buy Commodities (Oil; Gold; Metals; Agri’s)
• Sell European, US and Japanese equities

The proverbial “Summer Rally” in North American equity markets came to an end last week. US and Canadian equity markets have a history of moving higher from late June to mid-July prior to release of encouraging Q2 corporate results. The 2018 summer rally has been helped by anticipation of strong Q2 corporate results (21.3% y-o-y gain by S&P 500 companies and a 24% increase by TSX 60 companies led by the energy sector). Seasonal influences normally turn Negative from the 3rd week in July to mid-October. More signs of a seasonal peak appeared last week. Unless a company announced “blow out” results, many S&P 500 stocks moved lower following release of results. Traders took profits on news, particularly when a company lowered its Q3 guidance (e.g. Facebook, Exxon Mobil, Twitter, Intel). Last week, broadly based equity indices including the NASDAQ Composite Index, Russell 2000 Index moved lower. The TSX Composite Index moved lower for the second week in a row.

 

Seasonally, the next period of strength for the sector comes into play in the month of October.

Whilst bond investors have accepted higher interest rates, and there are increasing concerns about the US 10-year yields likely moving higher over the next 2 years, we continue to differ with those general views. As a matter of fact, we argue that Japanese and European balanced fund managers likely will increase exposure towards US long bonds, due to the extremely high spreads over the indigenous comparable bond yields. Hence, why we see the next 2 months 10-Y US Treasuries prices to increase and implicitly yields to come down towards the upper middle of the 37-year trend channel.