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Market Reviews Monthly Review

May 2019 - The U.S.-China trade dispute returns to haunt the markets

The excellent start of the year on the various stock markets around the world was based partly on the prospect of an agreement between the world’s two largest economies, the United States and China. The current political discourse has accustomed us to sudden reversals; unfortunately the month of May brought yet another example. The trade talks between the two countries reached an impasse at the beginning of the month, leading to an increase in the tariffs on Chinese imports as well as the threat of further measures by the U.S. administration. As China retaliated, fears about the conflict’s impact on global growth prompted investors to shun risky assets in favour of safe havens.


Canada was less affected by the setback. Some sectors managed to gain ground and, over all, the loss of -3.5% as measured by the MSCI Canada Index, was smaller than the declines recorded elsewhere. While Financials and Energy especially detracted from the market’s performance, Information Technology, Consumer Staples, Utilities and Communication Services limited the losses. As for the bond market, it played its diversification role well. Interest rates fell all along the curve, generating a price appreciation on top of the bonds’ yield return. 


As for our southern neighbor, it has had to bear the consequences of its actions. The protectionist measures announced on both sides have resulted in a downward revision of equity valuations. For the month of May, as measured by the MSCI USA Index, the U.S. market returned -6.3% in local currency. The greenback’s strength against our currency took some of the sting out of this performance; expressed in Canadian dollars, the loss was -5.9%. With the exception of Real Estate, all sectors contributed negatively to the performance.


The resumption of hostilities between China and the United States also had repercussions in Europe. The MSCI Europe Index returned -4.3% in local currencies. As on the U.S. market, almost all sectors were down. Utilities, a more defensive sector, was the only one that managed to stay in positive territory. The main European currencies declined against the loonie, however, and their weakness increased the loss to -4.8% when expressed in Canadian dollars.


Asia being the region where the conflict’s other protagonist is found, it is not surprising that this market also declined. According to the benchmark MSCI Asia Pacific Index, it returned -6.2% in local currencies. All the Asian currencies were up against the Canadian dollar, however, helping limit the decline to -5.4% when expressed in Canadian dollars. All the sectors contributed negatively to the performance, but especially Consumer Discretionary and Information Technology.


Investors’ flight to more-defensive assets also affected emerging markets, with all sectors recording a loss during the period. Consumer Discretionary, Information Technology and Communication Services had the biggest declines. Foreign currency fluctuations had little impact; according to the MSCI Emerging Markets Index, the performance during the period was -6.5% in local currencies and -6.7% in Canadian dollars.

Source: Bank of Canada and MSCI Inc.

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