Markets spent much of April in wait-and-see mode. Uncertainty persisted due to the first round of French elections and execution risk related to Trump’s planned healthcare and tax reform. However, as we write this memo, both issues have invigorated risky assets. Emmanuel Macron and Marine Le Pen emerged as final-round competitors in the French elections, with Macron appearing to be the front-runner. This was followed by Trump reiterating plans to slash corporate tax rates from 35% to 15%. As a result, both the S&P 500 and MSCI World Indices rallied from an intra-month trough to peak of 2.5% and 2.1%, respectively. Beyond the macro themes, a number of large-cap names reported solid earnings in the past week, with Caterpillar, McDonalds, 3M and Dupont all beating expectations. The TSX rallied in April, up 2.7%, as oil prices helped support the index. The US 10-Year Treasury yield fell to 2.18% before the French election resurrected the risk-on trade. As of 25-Apr-17, the benchmark yield was back above 2.33% as investors shunned safe havens.
Following an 11.9% drop in oil last month, a sharp reversal commenced in April. The price soared 12.8% to $53.40 as of 11-Apr-17, before pulling back to $49. Russia announced its intention to increase production to a 30-year high if OPEC and non-OPEC countries are not able to extend their supply reduction deal past 30-Jun-17. Gold has continued its climb, up 1.4% over the period and 12% since its mid-December low. Industrial metals did not fare as well, with Copper and Iron Ore paring gains to end the period down 1.4% and 9.4%, respectively. Iron ore has been highly volatile lately in response to rumours and reports of Chinese industrial production.
Two subjects have caused Canada to be prominent in North American headlines recently; home prices and trade.
Ontario is implementing a number of measures to rein in the housing market in the Greater Toronto Area, mainly a 15% foreign buyer tax. Foreign nationals who buy real estate in Metro Vancouver have been subjected to a similar levy since August 2016. While the tax worked to temper prices initially, Vancouver has seen consecutive monthly increases in February and March. Foreign buyer speculation is contributing to runaway prices, but low mortgage rates are also chipping-in. The Debt-Income Ratio reached a record high of 167% in Dec-16. Further, RBC’s Home Ownership Costs To Income Ratio is approaching 80%. These ratios highlight the consumers’ reliance on cheap debt.
Trump has targeted both Canadian dairy farmers and lumber producers, highlighting that federal and provincial subsidies create an unfair advantage for Canadian producers. He announced an average 20% excise tax on Canadian lumber imports and hinted at something similar for dairy producers. This debate is still in the early stages but initial reactions from Canadian trade representatives have not been positive.