The global economy continued to recover in the second quarter helped by the rollout of COVID-19 vaccines, U.S. fiscal stimulus programs and supportive monetary policies from major central banks.
U.S., Canadian and global equity markets ended the quarter stronger than when they started. U.S. Treasuries, government bonds and investment-grade corporate bonds also recorded positive returns.
The U.S. Federal Reserve (Fed) left interest rates in the 0 to 0.25 % range and said it would continue buying Treasuries and mortgage-backed securities to stimulate borrowing and spending. However, the Fed did raise its forecast for inflation to 3.4% by the end of the year. As a result, they indicated they may act sooner than previously planned to start increasing rates; possibly twice by late 2023.
The Bank of Canada also held interest rates at 0.25% saying it expects the economy to strongly rebound this summer. The bank added this would be led by consumer spending as vaccinations continue and provincial governments ease restrictions.
As in the U.S., Canadian inflation went north. Statistics Canada said a 3.6% CPI increase in May was the largest yearly increase in a decade and outpaced the 3.4% posting in April. The Bank of Canada reiterated it was ready to raise rates should inflation come in persistently above its 2% inflation target. However, it noted this recent bout of higher inflation was likely temporary, mainly driven by rebounding gasoline prices and calculations based on last year’s depressed levels.
Capital Markets in Q2
Global markets rallied despite inflation, cryptocurrency volatility and higher COVID-19 cases in several Asian countries. U.S. equities climbed on increasing economic optimism and news President Biden would propose a US$6 trillion federal budget for the 2022 fiscal year. Emerging markets equities rallied as well, as a weaker U.S. dollar and higher oil prices helped exports.
In fixed income markets, U.S. Treasuries and government-related bonds recorded positive total returns. Within corporate credit, investment-grade bonds advanced on the back of lower U.S. Treasury yields. Local currency and U.S. dollar-denominated emerging market debt also rose. Eurozone government bond yields increased in April and then remained largely unchanged for the remainder of the quarter.
In foreign exchange markets, the U.S. dollar depreciated against most major currencies as well as those of many emerging markets. This was again due to lower Treasury yields, increased U.S. fiscal spending, falling COVID-19 cases, increased vaccinations and continued hopes of a global economic recovery.
What can we expect now?
The global economy is expected to continue to accelerate throughout the summer months. We should see a wave of pent-up demand particularly in services industries such as travel, dining out and events. This will be fuelled by elevated household savings, continued fiscal and monetary support and the ripple effect from strong housing and equity markets.
Have a great week,
Tracey
Source: The information in this letter is derived from various sources, including CI Global Asset Management, Globe and Mail, National Post, Bloomberg, Investment Executive, Advisor’s Edge, Bank of Canada and Statistics Canada as at various dates. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps has been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.
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