October was a mixed month, Canadian and European equities performed well while bond markets were weak.  At the eleventh hour, a small region in Belgium held up the EU’s trade agreement with Canada but ultimately signed on.

 

October 2016 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

*Absolute change in yield, not the return from holding the security.

October was a negative month for many stock markets around the world.  The S&P/TSX Composite was up 0.62% in October, its ninth positive month in a row.  The major stock market indexes in the UK and Europe were also positive.  The Japanese Nikkei was the top performer in October at +5.93%.  The stock markets in the US were down for the month, with the Russell 2000 (a measure of small-cap stocks) was hardest hit at -4.81%.  Canadian small-cap stocks were also down, but to a lesser extent.  Stock market volatility remained low.

The big surprise in October was the decline in the bond markets in Canada and the US.  The broad FTSE TMX Universe Bond Index was down -0.91%, its largest decline since August 2015.  Nearly all of the government and corporate sub-indexes were down for the month, with government bonds fairing the worst. US bonds were similarly negative with the higher quality bonds in the Merrill Lynch AAA and BBB Corporate Bond Indexes down for the month, while the lower quality CCC and High Yield indexes were positive.  Emerging market bonds were up +0.7% in October, the sixth positive month in a row.

After two months of strong gains, Oil was down -2.9% in October.  Gold was also down in October at -3.3%.  The broad Bloomberg Commodity Index was down -0.52% for the month.

The Canadian dollar declined -2.2% against the US dollar to 1.3411, and was flat against the Euro.

Commentary

Belgium, a small country in Europe that once went without a federal government for more than a year (541 days to be exact), surprised many when the region of Wallonia voted against the free trade agreement with Canada.  Last minute negotiations in Belgium were successful and the Comprehensive Economic and Trade Agreement (CETA) is once again moving forward.

The Trudeau government is marketing the deal (which was largely completed under the previous government) as being good for strengthening the middle class.  As with any multinational agreement like CETA, it is difficult to know whether the deal will be a positive for the country, and whether the positives are enough to outweigh the negatives.  Here are a few of the highlights of the CETA.

A joint Canada-EU study concluded that CETA could increase bilateral trade by 20%, resulting in a $12 billion increase to Canada’s income.  The study also suggested that 80,000 new jobs would be created in Canada.

Tariff removals are likely the biggest benefit of the CETA.  Right now only 25% of the goods we sell to Europeans are tariff free.  The adoption of the CETA would mean that 98% of all tariffs (import taxes) would be removed.  One example given was the 8% tariff on Canadian maple syrup imports to Europe.  Likewise, the tariffs on cars built in Germany and exported to Canada would no longer apply.

CETA does not mean completely free trade though.  Many agricultural and farm products produced in Canada can be exported to Europe, but many of them are subject to strict quotas.  These quotas will be raised in most cases, increasing the amount that can be exported.  Any amounts in excess of the quotas would still be subject to tariffs.  The elimination of tariffs is generally a good thing for consumers, but might not be good for workers in domestic industries that are just scraping by.

One of the most contentious issues of the CETA for many Canadians and Europeans is the investor dispute resolution system, ICS.  The main criticism of ICS is that foreign companies could sue countries with laws that could hurt their bottom line in an attempt to get compensation or to have the law overturned.

While the CETA has been agreed to in principle, the 28 countries that make up the EU still need to individually ratify the agreement.  If Belgium is anything to go by, the CETA is far from a done deal.

 

October Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

Canada’s unemployment rate was unchanged at 7.0% in September despite 67,200 jobs being added; 23,000 were full time jobs and 44,100 were part-time jobs.  The rise in the labour force participation rate offset the job creation, keeping the unemployment rate unchanged.

Housing prices across Canada rose 0.8% in September according to Teranet.  Toronto (+2.2%), Hamilton (+1.4%), and Victoria (+1.1%) all posted monthly gains that were above the national average.  Quebec City was again the laggard at -0.8%.  Prices in Vancouver rose +0.2%, the smallest increase since April 2015.

The number of new housing starts rose to 220,600 in September, an increase of 19.8% from August. Building permit activity in August rose +10.4%.

Inflation was slightly positive in September at +0.1%.  On an annual basis, the inflation rate was +1.3%, the lowest level in almost a year, and remains under the Bank of Canada’s target rate of 2.0%.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables, and mortgage interest was +1.8% for the last year – the lowest reading in almost 2 years.  Retail sales were down -0.1% in August, but were up +1.6% for the past year.

GDP was up +0.2% month over month in August, or +1.3% compared to August 2015.  While all economic sectors posted gains in August, most of the growth was again attributed to the mining and oil & gas sectors.

While economic growth has been recovering from the first quarter of 2016’s slump, growth has not been strong enough to prompt the Bank of Canada to raise interest rates.  At the Bank of Canada’s October meeting interest rates were left unchanged after the BoC lowered their growth expectations for 2017 and 2018.  The BoC next meets on December 7.

 

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics