January 25th, 2019

Trade Disputes Disrupt Markets


Trade Disputes Disrupt Markets

Small week for Wall Street as the markets were closed on Monday in observance of Martin Luther King Jr. day. Global economic growth has been revised downward by the International Monetary Fund and the debt ratio in Canada has risen in the last months. The trade dispute between China and the United States continues to influence the markets. Here is what happened in the markets this week.

Market Brief

The US markets were closed Monday in observance of Martin Luther King Jr. day. A tough return from the weekend for Wall Street on Tuesday, as the three major US indexes opened down. Poor economic data from China and a warning from the International Monetary Fund (IMF) claiming lower global economic growth, revived fears concerning global economic growth.

Markets were up on Wednesday, boosted by the announcement of strong earnings from big companies such as IBM (+8.08%), Procter & Gamble (+5.22%) and United Technologies (+ 5.36%). “Their results help investors divert their attention away from fears about the global economy and China-US relations, as they continue to monitor closely what is being said at the Davos Economic Forum,” said Josh Selway, from Schaeffer. Wall Street opened down on Thursday after US Secretary of Commerce Wilbur Ross said the United States and China were not close to a resolution of the trade dispute.

The US markets began Friday’s session with several gains, helped by strong quarterly results. The Dow opened up 270 points, the S&P 500 gained 1% and Nasdaq was up 0.7% thanks to the good earnings from Starbucks (+ 3.80%). “The majority of companies that publish their numbers exceed expectations,” recalled Peter Cardillo of Spartan Capital Securities. “But the results are also good, there are no windfall gains, announcements of big job cuts or drastic cuts in spending,” he added.

The TSX ended up by 50.33 points on Monday for a twelfth consecutive session but opened down the next morning as worries about the global economy drove oil prices down. Wednesday, the Toronto index started the day with some gains but fell back in the middle of the day, losing 12 points. Canadian markets opened without direction Thursday, still marked by concerns over trade disputes. The TSX advanced on Friday, driven by shares of precious metal miners as demand for gold, a safe-haven asset, rose due to concerns regarding global economic growth and political uncertainties.

International Monetary Fund

The International Monetary Fund has once again revised downward its growth prospects for the world economy. “Although global growth in 2018 has remained close to the peaks achieved after the crisis, expansion is weakening, and at a slightly faster pace than expected,” said new chief economist Gita Gopinath. “These revisions are certainly modest,” she said in Davos, in the Swiss Alps, on the eve of the World Economic Forum. “This does not mean that we are on the brink of a great recession, but it is important to draw a link between the many and growing risks.”

The IMF expects global growth of 3.5% in 2019, while it estimated an increase of 3.7% for 2018. In its latest forecast in October, it estimated a 3.7% growth in 2019. As for Canada, the IMF estimates that the country’s growth will be 1.9% rather than 2% as it had anticipated last October. According to them, trade tensions are a considerable risk to the growth of the global economy. “Increasing uncertainty around international trade would further constrain investment and disrupt global supply chains,” Gita Gopinath said.

Debt Ratio
According to a new survey, the number of Canadians who are at $200 or less in financial insolvency after paying off all their monthly bills and debts is up 46% this quarter. This percentage was around 40% in the last quarter. The poll conducted online by the MNP Insolvency Company in December also reveals that 31% of people surveyed believe that their salary is not enough to pay all their monthly expenses.
The survey also shows that 45% of people said they will need to borrow more in order to pay their expenses. “Higher interest rates, tied with the fact that household spending exceeds their income, mean that some are unable to significantly reduce their debt and, in fact, continue to run up debt, particularly they face unforeseen expenses,” said Grant Bazian, president of MNP.

Trade Dispute

While the trade dispute between China and the United States continues, the two countries have given themselves until March 1st to reach an agreement. On Thursday, the US Secretary of Commerce, Wilbur Ross said on CNBC that an agreement was far from being reached between the two countries. “We have done a lot of preliminary work, but we are miles and miles away from finding a solution,” he said, making the markets go down before adding, “There is a reasonable chance that we found an agreement.” He also said that the fact that an agreement is probably still far “Frankly, that shouldn’t be too surprising” because there is “lots and lots of issues” as trade negotiations are “complicated.”

The United States has been trying for several months to bring China to change its commercial practices deemed unfair by the Trump administration. Washington wants Beijing to expand its market to US products while ceasing business subsidies. The trade deficit between China and the United States has risen by $323.3 billion in 2018, the largest since 2006. The dispute has weighed heavily on the markets for several months now worrying many investors.

Pratte Portfolio Management is registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).

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