Week in Review: Investor Optimism Riding High

For the week ending 20 October 2017

  • Cash on sidelines drops as sentiment rises
  • Fourth round of NAFTA talks wraps up
  • Fed sees US economy maintaining growth pace
  • US Senate budget resolution paves way for tax bill
  • Spain may impose direct rule on Catalonia

Global equities extended their gains this week amid signs the global economic expansion continues apace. Tax reform hopes in the United States and record-high equity indices helped fuel a rebound in US Treasury yields, which saw the yield on the 10-year note rise 10 basis points to 2.38% this week. Oil prices held steady, with a barrel of West Texas Intermediate crude oil changing hands at $51.70. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX) was also unchanged, at 9.9.

MACRO NEWS

Averages post fresh records amid bullish sentiment
Investor sentiment readings continued to improve this week as US equities again pushed to record highs. The latest Investors Intelligence survey showed that 60% of Wall Street newsletter writers were bullish on the market, up from 47% in early September, while the American Association of Individual Investors sentiment survey showed that 40% of retail investors were bullish on stocks over the next six months, an above-average reading. Meanwhile the Merrill Lynch fund managers’ survey reported that cash is moving off the sidelines and into equities, bringing average cash balances down to 4.7%, the lowest level since May 2015. Cash levels would need to dip further to generate a contrarian sell signal though, according to the firm.

NAFTA talks to extend into 2018
Negotiators from the United States, Canada and Mexico, who recently met to discuss changes to the North American Free Trade Agreement, had aimed to conclude talks by the end of 2018, well in advance of Mexico’s July presidential elections and US mid-term congressional elections next fall, but lack of progress has forced them to extend the talks into the first quarter of 2018. Officials from the three nations made clear they are at an impasse and have called for a nearly month-long break in order to regroup. US trade representative Robert Lighthizer said he had seen no indication that the trading partners were willing to make any changes that will result in a reduction in trade deficits.

Fed: Economy to expand despite hurricanes
The US Federal Reserve’s Beige Book, a report prepared in advance of each meeting of the rate-setting Federal Open Market Committee, said that the US economy continues to grow at a modest to moderate pace despite some disruptions from a series of hurricanes. Labor markets remain tight, with employment growth modest, according to the report. The Fed termed inflationary pressures as modest. Markets expect one more rate hike from the FOMC before the end of the year, probably in December.

Tax reform hopes raised as US Senate passes budget resolution
A fractious US Senate passed a fiscal year 2018 budget resolution late Thursday evening, helping pave the way, from a procedural standpoint, for a tax reform bill later this year. A conference committee will need to iron out differences between the House and Senate budget resolutions in the coming weeks. The Trump administration hopes to pass a tax bill before the end of the calendar year, though few would be surprised if the process extended into 2018.

Spain said to hold January regional elections in Catalonia
The Spanish government is said to have reached agreement with socialist opposition parties to hold regional elections in Catalonia in January. On Saturday, the government is expected to invoke Article 155 of the Spanish constitution, which would allow the central government to impose direct rule over the region in the event of a crisis. Catalonia’s leader, Carles Puigdemont, will counter by calling for a formal independence vote in Catalonia’s parliament. Spanish authorities hope January’s elections will produce a pro-Spanish government, putting an end to the crisis. Some fear that independence backers will boycott the election, calling its legitimacy into question.

China’s National Congress begins
China’s 19th Communist party congress began this week in Beijing, kicking off with a three and a half hour speech by President Xi Jinping. Economic reform took a back seat to the theme of national rejuvenation in the speech. Xi will be given a second five-year term atop the party at the end of the meeting. Also this week, China reported that its economy grew at a 6.8% annual rate in the third quarter, down a touch from the 6.9% pace registered in the first two quarters of the year.

EU officials punt “sufficient progress” decision until December
The European Council met this week, but deferred a decision on whether or not Brexit negotiators had made sufficient progress on a series of issues to allow the talks to move on to the topic of the future relationship between the United Kingdom and the European Union. While negotiations appear to be bogged down, German chancellor Angela Merkel said Friday that she is hopeful talks will be able to progress to future trade matters in December.

THE WEEK AHEAD

Date

Country/Area

Release/Event

Sun, 22 Oct

Japan

General election

Tue, 24 Oct

Global

Flash purchasing managers indices for October

Wed, 25 Oct

United Kingdom

Q3 gross domestic product

Wed, 25 Oct

United States

Durable goods orders, new home sales

Wed, 25 Oct

Canada

Bank of Canada interest rate decision

Thu, 26 Oct

eurozone

European Central Bank rates decision

Fri, 27 Oct

US Q3 gross domestic product

 

 

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In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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