Equities in the U.S. advanced steadily through the first quarter of 2017. With almost every U.S. leading indicator at cycle highs, investors shook off an interest rate hike from the Federal Reserve in March and pushed the major equity benchmarks to new all-time highs. The Dow Jones Industrial Average advanced 3.54% $CAD while the S&P 500 Composite Index fared slightly better at 5.04% $CAD (total return). A slight strengthening of the Canadian dollar over the full course of the quarter dampened the gains in $CAD terms. Within the market, sectors that led the way immediately after the U.S. presidential election began to lose steam as confidence in the outlook for Trump’s economic agenda waned, while sectors that lagged in the fourth quarter made up some ground. Bond yields also backed off their recent highs, despite the hike in official rates.
Canada’s S&P/TSX Composite Index rose more modestly than its U.S. counterpart, posting a total return of 2.41% for the quarter, and in February notched its first new all-time high in over two years. The move initially was led, as it was in the fourth quarter, by financials, particularly banks and insurance companies in response to higher interest rates and inflation expectations, as well as by materials benefiting from continued global growth and better commodity prices. Late in the quarter Canadian banks faltered with the stalling of the “Trump trade,” while the materials sector held onto its lead in year-to-date performance. Energy underperformed as the oil price advance spurred by November’s OPEC production cut agreement stalled in early 2017 and largely unwound its earlier gains late in the quarter.
Despite a distinctly more hawkish U.S. Federal Reserve (the March hike was its second since December) the Bank of Canada maintained its neutral position on rates. The widening differential between the two countries’ official interest rates weighed on the Canadian dollar late in the quarter, while the pullback in oil prices added to the loonie’s renewed weakness.
Global markets continued to take their cue from rising economic growth and inflation expectations with the MSCI World Index advancing 5.34% $CAD, showing gains in all sectors except energy. The MSCI Europe Index climbed 6.40% $CAD despite growing political uncertainty around Brexit and the upcoming French elections. Asian Pacific equities in $US terms had their strongest quarter in five years as currency declines that depressed prices in the fourth quarter largely reversed. The MSCI Asia Pacific Index jumped 8.35% $CAD.
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