Uncertainty clouds view of global markets
by Kristina Hooper, Global Market Strategist, Invesco Ltd., Invesco Canada
For the past several months, I’ve talked about disruption as a key theme for 2017 and argued that it would have three key sources this year, including geopolitics and monetary policy. Last week was emblematic of that theme, as geopolitical events and central bank decisions shared the spotlight.
Geopolitical concerns in North Korea and the U.K. generate uncertainty
Last week started with geopolitics at centre stage: North Korea had announced over the previous weekend that it is now able to fit a hydrogen bomb on an intercontinental ballistic missile – a frightening development for the free world. It is evidently racing to develop nuclear weapons, moving more quickly than expected. It is not clear how this situation can be successfully resolved.
We also saw a very public debate about Brexit unfold in British Parliament last week. Prime Minister Theresa May must deliver a speech detailing her negotiating positions later in September, ahead of the European Union (EU) summit in October. We are entering a critical point in Brexit negotiations and, as the clock ticks, it seems there is less consensus within the U.K. today than there was six months ago on what Brexit should look like. It is concerning to hear EU Brexit negotiator Michel Barnier say that these negotiations are an opportunity “to teach the British people and others what leaving the EU means.” I would expect him to view the negotiations over the “divorce bill” as his first “teachable moment,” given the vastly different views held by the EU and the U.K. on the tab.
Central bank surprises in Canada, the U.S. and Europe
Then monetary policy wrested the spotlight. Rumours emerged early in the week that Gary Cohn’s chances to be named as the next U.S. Federal Reserve (Fed) chair have diminished, the result of his rebuke of President Donald Trump in the wake of Charlottesville. The Trump administration reportedly has a long list of possible candidates, including a number of businesspeople, which injects uncertainty into what the future Fed will look like.
Adding to that uncertainty, Fed Vice Chair Stanley Fischer submitted his resignation, effective in October. His term was set to expire next June anyway, but his decision to make an early exit was unexpected and comes at a time when the Fed is set to begin what is arguably one of its most important but risky undertakings – balance sheet normalization. We can’t forget that we are in experimental territory, and Fed Chair Janet Yellen’s emphasis has been on a very slow, deliberate and thoughtful unwinding process. I believe Mr. Fischer’s resignation increases the likelihood that the Fed will announce the start of normalization at its September meeting. However, I think this resignation also increases the odds – albeit still low – that newcomers to the Fed may challenge the plan for balance sheet normalization or take a more hawkish stance on rate hikes.
Monetary policy continued to command the spotlight with the Bank of Canada’s (BoC) surprise decision to raise rates. This was the BoC’s second consecutive rate hike after nearly seven years of maintaining ultralow rates. While recent economic data has been largely positive in Canada, I believe the BoC may be hitting the brakes too fast. While the Canadian economy is experiencing solid growth, it is facing several headwinds, including higher taxes and lower housing demand in key regions.