- Equity markets pulled back this week amid a quiet run of economic data.
- The S&P 500 slipped 1.4%, with banks (-4.1%) and energy (-3.4%) posting the deepest declines, while defensive sectors held at the top of the leaderboard.
- While the data flow was light, Fed Chair Powell testified to Congress, reiterating that the rate hold at the last meeting wasn’t necessarily a pause (more like a skip that reduces the tightening size); and reinforcing that they could be leaning against inflation with these elevated interest rate levels for a while still.
Last week, the Bank of England raised interest rates by 50 bps, prompting speculation on the state of U.S. and European markets. Broadly speaking, international markets benefitted from some positive economic surprises in late 2022 and early this year. This created a tailwind and was the primary reason why EAFE outperformed even the U.S. market for a period of time. But those positive surprises are now diminishing, and some are even turning negative. This reversal is tied in part to inflation, which remains much higher in Europe than in North America. As a result, the Bank of England and European Central Bank (ECB) remain on more aggressive paths than their counterparts across the Atlantic. This will put more pressure on the European consumer and weigh on the U.K. and EU economies. In Canada and the U.S., conversely, the consumer is holding up fairly well, which is why an economic downturn—which remains likely—isn’t imminent. Europe also has somewhat different issues than North America, with the Russia-Ukraine war and a disappointing reopening in China (on which Europe is reliant) creating a drag on the economy.
Bottom Line: The U.S. and EU economies appear to be weakening again, so investor caution is certainly warranted.
Canadian Dollar (CAD)
Bottom Line: Significant appreciation or depreciation of the CAD is unlikely in the short term, and while minor movement is possible, it’s difficult to predict given economic uncertainty.
Bottom Line:Cryptocurrencies like Bitcoin may have a role in portfolios as an alternative asset class, but they’re not a replacement for gold.
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