Sentiment in Canada improved in Q3 with the Canada Manufacturing PMI reaching 57.1 in June, the highest level in five years.1 Both July and August sentiment data remained robust despite the uncertainty of the trade pact between the U.S. and Canada. The consistently solid readings in PMI data point to modest growth in the Canadian manufacturing sector throughout the rest of 2018. Economic signals have also been strong for Canada led by industrial capacity utilization, which improved significantly in the third quarter. This strength provides an encouraging picture for economic growth in the latter half of 2018, and the economic surprise index also increased steadily in recent months. 

 

What is the outlook for the Eurozone (EZU) going forward?What is the outlook for the Eurozone (EZU) going forward?

Our outlook for the Eurozone (EZU) is less optimistic compared with our view of the U.S. (IVV) and some other international equity markets. Four indicators used to determine asset allocation are all in negative territory for the Eurozone: technical, sentiment, macroeconomic and valuation. The annualized Eurozone GDP growth rate for the second quarter was revised down to 2.1%, which supports that the growth rate may have peaked at the end of last year and is on pace to slow down in 2018. Eurozone industrial production also declined by 0.8% month-over-month in July, lower than the consensus analysts’ forecast. The Eurozone’s sentiment indicator dropped slightly in recent months. The main drag came from deteriorating consumer confidence amid concerns of easing demand and unresolved trade talks with the U.S. Political uncertainty has also created unease in the union. Valuation and technical signals for the E.U. are weak according to our global tactical asset allocation (GTAA) model. 

Our near-term outlook for the Pacific region developed market, excluding Japan (EPP), is more upbeat with macro and sentiment signals being the major contributors. Recent Australian economic data have been encouraging as the GDP annual growth rate hit 3.4% during the second quarter. The country’s labor market has been tightening with the unemployment rate continuing its downward trend and the labor participation rate picking up. Downside risks remain in the region with escalating trade tensions between the U.S. and China. Hong Kong’s PMI data remained low and indicated contraction in private sector activity for five consecutive months. This contraction is largely due to shrinking Chinese demand for Hong Kong’s products and services. 

 

U.S. equity positions continued to move higher (IVV, IJR, IJH). What were the most prominent factors that led to these gains?

Despite some unease in the U.S. stock market, it has performed significantly better than other major international equity markets. The divergence this year has been largest between U.S. and emerging market equities, which have lost roughly 10% YTD due to trade tensions and a rising U.S. dollar. U.S. small-cap stocks (IJR) have outperformed their large (IVV) and mid-cap (IJH) peers this year and our outlook remains more bullish for small-caps relative to these peers. Earnings have been one of the main drivers of the impressive U.S. equity market performance. Our outlook remains cautiously bullish with relatively strong technical, sentiment and macroeconomic signals. New economic data has also been solid recently. Payroll growth, initial jobless claims, retail sales, industrial production and consumer and credit sentiment have all been moving in positive directions.