Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

There are four primary drivers behind Monday's market weakness. Some are directly linked to the clown show in Washington, D.C., while others have causes of their own.

Friday's congressional failure to pass U.S. President Donald Trump's health care reform bill is sociologically important on its own, but for investors the apparent political dysfunction – which raises fears that market-friendly corporate tax cuts and infrastructure spending will also fail to become reality – is the real threat to future returns. Bloomberg cites Citi research to underscore this point, "Although tax reform appears to have broader support and may be easier to pass, the AHCA [American Health Care Act] experience sends investors a cautionary message about opposing factions within the GOP caucus," Citigroup Inc. analysts wrote.

Bond markets have been consistently signalling skepticism about future U.S. economic growth in recent weeks. Economic optimism initially caused higher five- and 10-year Treasury bond yields to surge higher, and huge speculative short positions were amassed on these bonds in futures markets. At least in the past few trading sessions, investors are finding returns in bonds more attractive than equities.

Since March 13, however, bond markets have rallied. The 10-year yield has fallen from 2.62 per cent to 2.35 per cent and the five-year yield has fallen 24 basis points. Speculative investors are now scrambling to cover their shorts, driving bond prices higher and yields lower. In general, lower bond yields indicate slower growth expectations. But at least in the past few trading sessions, investors are finding returns in bonds more attractive than equities, and allocating their assets accordingly.

The U.S. dollar, measured by the trade-weighted dollar index, has dropped 5.1 per cent from the 2017 highs, and weakness in the Russell 2000 index of domestic-facing U.S. smaller companies, are two more signs that U.S. growth expectations are being adjusted lower, and the belief that the American economy can re-take global leadership is waning.

Weaker crude and copper prices have drivers of their own beyond Washington. In the first case, the oil price is heading lower as mistaken speculative optimism is reduced. Hedge funds had built record long positions in crude futures markets, only to be confronted by stubbornly high U.S. inventory levels (thanks to rising shale production) that caused the commodity price to stagnate. The removal of these bullish trades continues to weigh on the spot price.

Copper markets are affected by both economic growth expectations and market supply. The copper price appreciated 32 per cent between October, 2015, and February of this year as part of the reflation trade. The rally intensified because as labour action interrupted supply from Chile's Escondida mine, the world's largest, and also as a result of a dispute between the Indonesian government and Freeport McMoran Inc., which limited exports from the world's second-largest producer of copper concentrates.

These disputes have now ended at a time when inventory levels remain high, creating excess supply and lower commodity prices.

Political incompetence has combined with separate issues in commodity markets to create weaker asset markets. It is not, however, time to panic in my opinion. The Citi Economic Surprise Index, which measures developed and emerging market economic growth relative to consensus expectations, continues to soar higher. Morgan Stanley analysts note that the synchronized strength in emerging markets and first world economies has not occurred since 2010.

Market weakness is never fun for investors but it looks very much like we're looking at a re-calibration of expected growth, with the most bullish global investors having to pull in their horns, rather than the beginning of an extended equity bear market.

Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

Latest Videos

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies