Market Review: June 2016

The UK is leaving the EU, now what?

The Brexit vote came and went, with most analysts and many of us scratching our heads that the UK decided to leave the European Union (EU). Google confirmed that one of the main questions typed into its search engines on that day was, “What is the EU?” which begs the question, if anyone there really had any idea what they were voting for in the first place. Adding more pain, to all their soccer (football) fans, “England is the first country in history to leave the EU twice in once week.” Which one hurt more? The UK will eventually be ok, but it could take 5 years of uncertainty to find out where they will stand among the global players. June happened to be a hectic month for the markets as the prospect for a US summer rate hike were fairly high until the Brexit vote which now decreases the chance of a rate hike in 2016 altogether. The vote sparked a sell off in the markets around the world, until someone realized that nothing as of yet actually changed at the underlying companies within the UK; or that other global companies may have limited exposure to anything detrimental. The recent market rally proves that the global impact of the 5th largest economy in the world has far less strain on global growth than China or the US. Gold has been rallying while crude oil prices have stabilized and are ranging from $46 to $50 range, both positive signs for our resource driven economy.

The most notable developments this month have been the following.

Canada

• ‍‍Recent well performing sectors are Basic Materials, Energy, Utilities and Telecommunications.
• Basic Materials continues to be Canada’s best performing sector in 2016 returning 48.41% YTD.
• The price of Gold and Silver made new 52-week highs this past month with levels not seen since early 2014.
• Crude Oil prices stabilized during June as prices ranged from $46 to $50 per barrel.
• The Canadian dollar strengthened in June against the US dollar approximately $0.01 ($0.775) from last month due to increased resource prices.
• The Bank of Canada has said that it is difficult to predict when the Canadian economy will rebound because Alberta’s oil operations are still not fully restored. There is also a new carbon tax in Alberta that may affect growth in the sector.
• Canada’s private sector created 85,000 net new jobs from January to May, which is the biggest increase for the first five months of the year since 2012.
• Housing prices continue to soar in major cities within Canada, especially in Vancouver and Toronto where these areas are up approximately 15% year over year on average, which is the highest it has been since 2010.
• Only 3% of Canada’s goods export to the UK, thus limiting any real negative impact it may have on our exports due to the Brexit vote. Canada has the opportunity to offset any potential losses with growth in Europe as a result of the EU possibly lowering their imports from the UK.

United States

• ‍‍Recent well performing sectors are Utilities, Energy, Telecommunications and Consumer Staples.
• The result from Brexit vote has diminished the chance on a rate hike this summer. The only way the Federal Reserve would change its view now, would be if there are even better economic numbers then they were expecting before. As a result, interest rate sensitive sectors have performed well as Utilities rose approximately 7% since the last month.
• Stronger growth in the 2nd quarter for the world’s largest economy comes after a soft 1st quarter. However, it does not signal that we are clear for good times ahead, as the overall economic growth trend is losing a bit of steam.
• Despite recent volatility, the majority of company fundamentals point to sustainable growth, but keeping a close eye on the overall economy is imperative as revised lower growth targets may be a thing of the future if something doesn’t jumpstart the economy.
• As expected during uncertain times in the rest of the world, the reserve currency of the world “for now” rose this past month against most of the world’s currencies.
• 30 major US financial institutions recently passed the Federal Reserve’s stress test, showing health in their operations.

Global (UK Edition)

• As you have read about it a hundred times by now, the infamous Brexit vote went by the way of the UK voting to leave the European Union causing a temporary selloff in global markets and a more severe downgrade to the British Pound. I hope the Queen bought some US dollars before the vote.
• The British Pound fell over 10% in one day and is currently hovering at $1.3213 US as of June 30th.
• David Cameron the British Prime Minister stepped down as a result of the vote and said that it will be up to his successor to determine when to trigger Article 50 that would start the process of the UK leaving the EU. It is expected that the UK will exit the EU over an extended time frame which is yet to be determined.
• Former Canadian Bank of Canada governor Mark Carney, the current Bank of England governor stated that they are prepared to provide $250 billion in stimulus to the economy if need be; an attempt to show the world that they will do anything in their power not to slip into a recession. At this point, we see most central banks (UK, Europe, US, etc…) taking a “wait and see” approach before implementing any additional easing measures into their own economies.
• Unemployment in the European Union dropped to 10.1%, the lowest level in almost five years. Even Spanish unemployment is improving; falling below 20% for the first time in six years.
• Unlike the UK, China’s economic impact is far more important and finally showing evidence that their economy is moving towards consumption and away from investments and trade. But it comes at a price to the overall global growth, especially to their worldwide partners in which China has deep supply chain linkages, largely in Asia.

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Eye on the Month Ahead

• Will there be continued volatility as a result of the Brexit vote?
• What impact will the Brexit vote have on the domestic UK and EU economies?
• Can oil continue its surge past $50 a barrel and stay above this key level?
• Will the global economy pick up without the use of further stimulus?
• Can the US maintain it safe haven status among investors for the remainder of the year?
• Will the upward price momentum in the markets will continue over the summer months?
• We continue to believe having a globally balanced portfolio with a focus on low volatility will help lower overall investment risk while having the ability to capitalize on investment opportunities.

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Economic Calendar

Please do not hesitate to contact us if you have any questions or would like our team to review your investment strategy.

Kind Regards,

Konrad Kopacz, Justin Lim and Merriel Dean

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Sources: Market Q, Bloomberg, Reuters, Globe and Mail, Wall Street Journal, Huffington Post, Forbes, Goldman Sachs, National Bank

Disclaimer: Echelon Wealth Partners Inc. is a member of IIROC and CIPF. This document has been prepared as a monthly market update and does not contain any recommendations for any particular investment. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any investment decision should be based on your own risk tolerance and investment objectives and reviewed with an investment advisor. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. The data used in this document is from various sources and is believed but in no way warranted to be reliable, accurate, complete and appropriate.