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CA-EN Institutional

Has the Dragon Been Slain?

July 17 to 21, 2023


Has the Dragon Been Slain?

July 17 to 21, 2023

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Weekly Commentary

Market Recap

  • Equities rallied this week amid generally strong earnings reports and a softer-than-expected U.S. inflation print that suggested we might be nearing the end of the road for Fed tightening.
  • The gains extended beyond Wall Street, though—the TSX closed the week 2.2% higher, and even the CSI 300 was up almost 2% on the week.
  • Annual growth in U.S. CPI slowed to 3.0% in June, a full percentage point below the previous month’s pace.


June’s U.S. CPI numbers are in, and they were a pleasant surprise, with inflation cooling to 3% over the previous year. We expected the CPI numbers to come down, but not by that much. It’s a good sign that the inflation picture is improving and is likely to provide much-needed relief to consumers going forward. Our expectation is that it will push a potential recession even further out. But it also puts pressure on the U.S. Federal Reserve (Fed). As we saw, the Bank of Canada (BoC) raised interest rates at its last meeting, which we were expecting. The Fed may still follow suit, but if we continue to see CPI numbers in this range or lower, there’s a real possibility that they will opt to stay on the sidelines for a while after their next meeting. Equity markets, meanwhile, may continue to chug along, which is why we advise not taking excessive risk off the table. With the exception of a pause during COVID, we’ve essentially been in a bull market for the last decade. We’re not entirely finished cleaning up the mess that COVID caused, but we are largely back on track, even if a pullback at some point remains a possibility.

Bottom Line: Central banks are likely to view the latest CPI numbers very positively, and the economy remains much stronger than many people realize.


Chinese exports fell by 12.4% in June compared to a year prior, the largest decline in over three years and well above the 9.5% decline that analysts had expected. This is an important number. During COVID, companies couldn’t rely on exports out of China and were forced to look elsewhere. The question was—when China reopened, would their export business bounce back? We didn’t expect it to come back fully, but it looks like it’s coming back even less than initially expected. Companies are also interested in diversifying their supply chains, not wanting to put all their eggs in one basket. These factors help to explain why China has underperformed this year relative to lofty expectations, and they’re likely to have a combination of knock-on effects. In the rest of Emerging Markets (EM), the news could be a positive, because if China’s not exporting, another country will. However, for developed markets seeking the lowest-cost inputs, the effects are less straightforward. China has fairly efficient supply chains, so if companies switch to new areas, there could be hiccups in the near term (or even the longer term) as operations get up and running.

Bottom Line: It’s looking increasingly likely that China might not bounce back as much as expected, which is why we’ve decreased our allocation to EM compared to the beginning of the year.


Where does Energy stand within the evolving economic backdrop? We’ve said for some time that Energy was undervalued, even amid concerns around OPEC cutting production and Chinese demand failing to materialize as expected. Those concerns haven’t gone away. But there has been a bit of a lift in energy prices of late, and the question is whether it will persist in the near term. We anticipate it will if market sentiment continues to be bullish. But is there a catalyst at the moment that could drive prices significantly higher? Probably not. We think there will be a better time to jump back into the sector down the road, and for the time being, we’re content with the gains we realized last year and early this year before we closed out our bullish position. There are also other opportunities that we prefer—Tech, for instance, which has recently outperformed.

Bottom Line: Uncertainty in Energy remains higher than we’d like, and for now, we think it’s best not to overweight that area.


Kudos to our Multi-Asset Solutions Team (MAST) for being prudent and not taking off too much risk despite some signs of economic weakening and predictions of an imminent recession. The latest inflation numbers we’ve seen, and the fact that the recession continues to get kicked down the road, has justified that perspective. Our independent thinking has served us well in this instance, and by staying the course, we’ve added tremendous value for our clients. We’re continuing that approach this month by remaining neutral on Equities while moving to neutral on Fixed Income and Cash. This provides a chance to benefit from potential Equity outperformance in the short term while having some (but not too much) protection against risk; we don’t, for instance, want to be locked into GICs when better opportunities in bonds could emerge later in the year. The decision to stay balanced was an important one, and we expect it to continue play out well this month, as it has all year.


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