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February 05, 2020

Q4 market update: How global trade concerns have affected the market

The global economy in the fourth quarter sent mixed signals to investors. Here’s what happened.

Highlights

  • Investors gained some confidence about the global economy heading into 2020. This was due to the U.S. and China reaching a preliminary trade deal.
  • Canadian business investment and household spending was stronger.
  • Financial markets saw ups and downs in Q4 (October to December of last year). But the period ended on a higher note.

Trade had a large impact on the global economy

Global economic activity in the third quarter (July to September) of 2019 was stable compared to the previous quarter. (Third-quarter activity was reported during the fourth quarter. This was the result of the typical lag time in gathering and reporting key data.)

  • In the U.S., economic growth rose to 2.1% in the third quarter.
  • Europe’s economic growth was similar to the previous quarter.
  • China and Japan reported that economic growth had slowed.

Around the world, inflation remained weak as a result of continued low energy prices.

International trade disputes, particularly lingering issues between the U.S. and China, had a negative impact on the manufacturing industry. The slowdown in the global economy was bad for manufacturing. But Canada and the U.S. showed strength in manufacturing activity as their economies were stronger than many other regions.

Delay of Brexit has affected the markets

The delay of Brexit proceedings in the quarter was caused by the U.K. government not reaching an agreement over the U.K.’s planned exit from the European Union (EU). The uncertainty had a somewhat negative affect on economic and financial markets. A snap election took place and the Conservative party in the U.K. was victorious. As of January 31, 2020, the U.K. stopped being a member of the EU.

Canadian economy strengthens

Many countries faced the likelihood of weaker economic growth in the fourth quarter. This risk was recognized by the willingness of central banks around the world to lower interest rates. At the same time, central banks took added measures to stimulate their respective economies. Canada’s prospects for economic growth, however, remained fairly stable during the fourth quarter.

Business investment and household spending in Canada grew during the third quarter. The real estate market remained strong in many regions of the country. Recognizing Canada’s relative strength compared to other countries, the Bank of Canada (“BoC”) held its benchmark interest rate at 1.75% during the fourth quarter. The BoC believed that its current key interest rate was suitable. Their decision to keep its 1.75% was due to the rate of inflation remaining close to the BoC’s target, relative stability in commodity prices and overall economic growth.

The BoC is continuing to follow global trade developments. They will also watch the strength of the global economy to assess its potential effect on Canada’s economy. After all, not everything was positive for Canada over the period. The labour market showed some weakness during the quarter as the economy lost 71,000 jobs in November. This pushed Canada’s unemployment rate up to 5.9%. Export activity was still rather strong, but also declined in the fourth quarter, while gross domestic product growth slowed in the third quarter (as reported in the fourth quarter).

Major financial markets still gained despite uncertainties

Continued U.S.- China trade tensions and other issues related to international politics caused some market volatility or uncertainty over the period. That said, major equity markets rose (some significantly), including those of:

  • Canada,
  • the U.S.,
  • Europe,
  • the emerging markets,
  • China and
  • Japan.

The Canadian equity market reached a record-high level during the quarter. Notable progress in trade discussions between the U.S. and China was made, which is positive for Canada. Lower interest rates in many countries also had a positive effect on the performance of global equities.

Oil prices rose over the quarter. The Organization of the Petroleum Exporting Countries committed to production cuts to help stabilize the price of oil. Easing trade tensions between the U.S. and China led to expectations that the global demand for oil may increase.

Gold prices also rose over the period, as did the price of other metals. This had a positive effect on resource-focused markets such as Canada’s.

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