Steady as she goes in the dog days of July

In the easy-breezy days of summer, most market trends simply carried on from June, while market volatility remained at low levels. Even the stock markets are taking it easy for the summer.

The record breaking low levels of S&P 500 market volatility (as measured by the VIX Index) are starting to get some attention. The low level of the VIX have some worried that complacency is sowing the seeds for a market pullback, but at this point it is hard to say what is behind the lull in market swings.

Broadly positive economic data and strong earnings results helped keep upward momentum for European and American stocks. Emerging market equities continued to outperform their developed market peers due to a weaker U.S. dollar and strengthening commodity prices.

The Canadian market ended the month close to flat and continues to significantly lag its international market peers in 2017.

Sticking with fundamentals

Like nearly every month in the past 12 months, U.S. President Donald Trump and the state of American politics dominated headlines, but notably, politics has had a much smaller effect on capital markets of late.

Despite the colourful cast of characters and significant staffing shake-ups within Trump’s administration, market watchers are choosing to act more like BNN than TMZ. They’re sticking with solid stock fundamentals, such as corporate earnings and sales results, driving their confidence in capital markets. As a result, the S&P 500 gains can largely be tied back to strong corporate earnings and pleasingly strong sales results.

Where politics and policymakers have played a role is in currency moves. Another failed attempt at American health care reform cast further doubt on the Republicans’ pro-growth agenda and put downward pressure on the U.S. dollar.

In addition to political uncertainty in the United States, two factors pushed the Canadian dollar higher. One was a shift in monetary policy as the Bank of Canada raised rates in July and signaled more hikes are to come. The other was this country’s strong economic results that show Canadian GDP growth is on track to lead the G7 in 2017.


Once again, the Canadian stock market lagged its peers, hovering just below the break-even point for both the month and the year-to-date results. While previous blame was rested squarely on the shoulders of the resource sectors, this was not the case in July.

The Canadian market experienced a sector rotation in July. The industrial and consumer sectors had a significant pullback, while the materials sector gained ground and the energy sector led the way as the top performing sector – a noted reversal from the sharp declines experienced in the first half of the year.

On the downside, Canadian rail companies weakened in July. Both Canadian Pacific Railway and Canadian National Railway reported decent earnings numbers in July, but management guidance for future earnings was not up to analysts’ expectations. The disappointment drove each stock’s price down by approximately 6%.

The consumer sectors were also a drag on Canadian market performance. There was no overriding theme across the consumer staple and consumer discretionary sectors in July. Rather, several stock-specific stories played out, such as Loblaw’s profit-cutting concerns after Ontario’s announcement to raise minimum wage.

To the upside, energy stocks were buoyed by rising oil prices, which closed July a smidge above US $50. That’s significantly up from June, but still down from the 2016 year-end price of US $53.72.

Improving supply fundamentals for oil, such as falling inventory levels and production quota agreements, have eased some of the pricing pressure. A weaker U.S. dollar was also a significant contributor to the higher price per barrel.

Within the materials sector, a 7% bump in copper prices in July boosted returns. Copper values were also aided by a weaker greenback, as well as the potential for increased Chinese demand.

Tough month for Canadian bonds

Bond yields rose in Canada across the board and the 10-year Government of Canada bond topped the 2% mark for the first time since November 2014.

Tightening monetary policy, a slew of strong Canadian economic data and firmer oil prices are all putting upward pressure on yields. As yields rose, bond prices dropped, with the more interest rate sensitive longer-term bonds losing the most ground.

Pretty much the only relief in the Canadian bond market came from credit products, like corporate and provincial bonds. Credit spreads narrowed and the relatively higher yield compared to Government of Canada bonds helped to offset some of the headwinds faced by fixed income products in a rising rate environment.

Highlighting the “best performing” bond sector is small comfort for a negative month. Losing money is never pleasant, though losing less is usually better!

While equity volatility is currently low, it is unlikely that it will remain so indefinitely - and then again we will see the stabilizing benefits of bonds within a diversified portfolio shine.

Table 1: Summary of major market developments

Market returns*
S&P/TSX Composite -0.3%
S&P 500 1.9%
- in Canadian dollars -2.0% 2.4%
MSCI EAFE 0.6% 6.4%
- in Canadian dollars -1.1% 6.8%
MSCI Emerging Markets 4.4% 18.7%
FTSE TMX Canada Universe Bond Index** -1.9% 0.4%
FTSE TMX Canada all corporate bond index** -1.4% 1.4%

*Local currency (unless specified); price only
**Total return, Canadian bonds

Table 2: Currency and commodities
(in USD, % change)

CDN$ $0.801 3.8% 7.2%
Oil (West Texas)* $50.17 9.0% -6.6%
Gold* $1,268 2.0% 9.6%
Reuters/Jefferies CRB Index* $182.64 4.5% -5.1%

Table 3: Sector level results for the Canadian market

S&P/TSX Composite sector returns*
S&P/TSX Composite -0.3%
Energy 2.0% -13.0%
Materials 1.7% 0.4%
Industrials -4.0% 6.4%
Consumer discretionary -2.8% 7.9%
Consumer staples -3.2% 0.4%
Health care -5.2% -3.9%
Financials -0.1% 0.6%
Information technology -1.1% 7.8%
Telecommunication services 1.5% 6.9%
Utilities -2.1% 5.5%
Real estate -2.4% 0.9%

*Price only Source: Bloomberg, MSCI Barra, NB Financial, FTSE TMX Global Debt Capital Markets Inc.

Copyright 2017 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.