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THIS WEEK IN THE MARKETS…

February 19, 2016

Sentiment improves, equity markets bounce back

Equity markets rebounded this week. As the mood of investors appeared to shift toward the positive, recently beaten-down sectors experienced strong advances.

North American markets posted healthy gains in a holiday-shortened week. Canada’s S&P/TSX Composite rose to a six-week high before falling back Friday as the financials sector and resource related stocks advanced. The materials sector benefitted from rising metals and mining stocks, although gold stocks lagged. Energy stocks advanced as oil prices rose sharply on news of a plan by a number of major oil producing nations to cap crude production. Prices eased at week’s end on inventory concerns.

On Wall Street, the financials, energy and technology sectors powered the S&P 500 to its best three-day rally since August and helped the Nasdaq Composite post a strong gain. Economically sensitive stocks rose as stronger data, including signs of improvement in the manufacturing sector, helped ease worries about the U.S. economy. Federal Reserve minutes from the latest policy-setting meeting indicated that the central bank appears increasingly unlikely to raise interest rates in the near future and possibly longer. However, Friday’s announcement of a jump in core inflation in January muddied the rate outlook.

Disappointing global economic news failed to stand in the way of the rally. Japan’s economy shrank 1.4% y-o-y in the last quarter of 2015 and corporate profits dropped sharply. Yet Japan’s equity market staged a turnaround from last week’s 11% decline, rising more than 7% on Monday alone. A declining yen earlier in the week improved investor expectations for exporting companies. An expected selloff in China’s equity market failed to materialize when it reopened Monday after extended holidays. The country’s central bank’s allowed the yuan to rise and injected liquidity into the banking system, helping stocks. Most other Asian markets rebounded on bargain hunting.

European markets bounced back on the strength of rising bank stocks. In recent weeks, banks had pressured by economic and profit concerns. Investors who believed the selloff was overdone ramped up financials sector holdings. Stocks were also boosted by the European Central Bank’s reaffirmation that it is prepared to boost economic stimulus at its March meeting if necessary.

In other news this week:

*   Canadian inflation was 2% y-o-y in January, the highest since late 2014, as a stronger U.S. dollar drove food costs higher.
*   The Canadian dollar benefitted from commodities strength, at one point rising above 73 cents U.S.
*   Canadian retail sales fell 2.2% in December, the largest monthly decline in more than five years.
*   The Organization for Economic Co-operation and Development (OECD) lowered its prediction for Canadian economic growth this year to 1.4%, down from 2%. It also reduced U.S. and global projections.
*   Canadian investments in foreign securities reached a record high in December as investors looked to further diversify holdings.

What’s ahead next week:

Canada

*   No major economic data releases.

U.S.

*   GDP, fourth quarter, second estimate.
*   Markit Flash Manufacturing PMI.
*   Durable goods orders.
*   House prices, sales.
*   Consumer confidence indexes.
*   Personal income and consumption.

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