Markets pulled-back in August as the MSCI World, S&P 500, and TSX indices all registered losses for the month. The MSCI World fared the best with a 0.8% drop, likely aided by currency as the USD continued to weaken. The value of the greenback relative to a basket of foreign currencies is 10.7% in 2017. The S&P 500 and TSX both slipped 1.3% during the period. Geopolitical concerns combined with the US debt-ceiling debate conspired to bring hints of volatility back to the market. The TSX decline was the fourth consecutive monthly decline in the Canadian index and represents a cumulative 5.7% decline from the 21-Feb-17 high. The resource-heavy index has suffered along with oil and the Bloomberg Commodity Index, which have stumbled 12.1% and 4.6%, respectively, over the same period. However, the decline is also indicative of an overall market lacking depth. The absence of tech exposure penalizes the TSX during a FANG-driven rally.
US 10-year Treasury Bond yields sagged during the month from 2.30% to 2.10%. Yields have fluctuated since the Trump election victory. The tug-of-war between consistently low economic growth and geopolitical risks (see North Korea) have contributed to the oscillating yields; as his conflicting data related to inflation expectations. For example, the copper-to-gold ratio is rising which has historically been a bellwether for inflation.
Gold has been the beneficiary of renewed volatility. The price has risen 4.9% for the month and it broke through $1,300 per ounce on 28-Aug-17. Time will tell if the yellow metal can hold beyond the $1,300 threshold. Since Nov-16, it has failed to sustain a breakthrough on three separate occasions. Gold’s appeal could strengthen due to the prospect for the cessation of bond repurchases by the Fed, geopolitical jitters and the debt ceiling debate.
We focused on USD weakness in our July commentary so we will spare readers the details, but political risks continue to pressure the currency. During the month, President Trump threatened a government shutdown if the debt ceiling is not lifted. With no resolution in sight, the financial implications of a stoppage are manifested in the currency and short-term Treasury Bill rates. We assume the can will get kicked further down the road, similar to the twenty raises that have been endorsed since 1993. This may prove to be another example of President Trump’s inability to push economic plans forward and it raises doubts about his competence to pass tax or healthcare reform. The Euro has moved opposite the USD, gaining 14.6% on the dollar since Dec-16. European Central Bank president, Mario Draghi, recently indicated that governing council could be the next one to embark on a tightening cycle. Beyond the headlines, the U.S. Commodity Futures Trading Commission (CFTC) reports indicate that speculators and hedgers have already piled into this trade, with long positions in the EUR rising to a 5-year high in August. Any disappointment from the ECB could reverse the rally quickly.