The markets roared ahead in February-March. That rise came with a potentially troubling spike in inflation, which could pump up interest rates. The Republican effort to cut red tape in the US is unleashing optimism. Oil bubbled up, then slid back down around the beginning of March.
Equity markets rise, with a touch of volatility
US President Donald Trump’s address to the US Congress promising tax reforms, reduced regulations and increased infrastructure spending has helped spur equities to record highs.
Both US and Canadian equity markets continued to chalk up all-time highs. However, in Canada much of the record growth was given back in the last week of the month. That occurred through broad sell offs in energy, materials and financial services sectors.
The renewed sense of global optimism has Asian and European equities tracking strong gains in the US. However, the European political landscape remains fragile. The UK is entering Brexit negotiations with the EU and France is holding an election.
Inflation boosts probability of Fed hike
Increased infrastructure spending and rising commodities drove the ‘reflation rally’ that has lifted world stocks to record highs. That rally has favored shares of companies more geared to growth and inflation. Stats Can reported an unexpected inflation spike to 2.1 per cent in January.
Inflationary pressure is also increasing the likelihood the US Federal Reserve will increase interest soon. The rise of the yield on the 10-year treasury note, coupled with remarks from the Federal Reserve presidents indicated an interest rate hike could be considered in the March meeting.
The Bank of Canada held rates steady. This supported an increasing divergence in monetary policy and government bond yields between Canada and the US.
Oil supply glut and productions cuts
Volatile oil prices trended upwards in February, but had a sharp decline in the first few days of March. Prices are balancing on OPEC cuts, record high U.S. crude supplies, slowing growth and a resurgence of US shale production.
As global equities rose, our portfolios saw significant gains. Higher interest rates could temper soaring growth rates. However, our portfolios are designed to minimize volatility. Indeed, we have prepared our fixed income to reduce losses from a potential interest rate hike. Our clients are well-positioned to take advantage of present favorable market conditions.