If geopolitics has you worried about equity markets over the next couple of quarters, you may be losing sleep needlessly.
At least, that’s the take-away provided by an economics report by CIBC Capital Markets, which concludes that likely outcomes for a potential war in the Korean peninsula or a potential trade war initiated by the U.S. won’t be worst-case scenarios.
More of a concern is the lack of tax and regulatory reform in the U.S., which investors in U.S. financials and corporates were counting on for relief, says Avery Shenfeld, managing director and chief economist at CIBC Capital Markets. With the calendar for tax reform pushed back, he says that “unless big deficits are in the Republican agenda, total personal and corporate relief is likely to be pared back from what some envisaged.”
That means pre-tax corporate earnings “are likely to speak louder in driving equities from here. Economics rather than politics will call the shots,” he says.
Second-tier U.S. economic indicators prove weak
Though some are upgrading U.S. growth, two secondary economic indicators released today show softness.
The pace of U.S. housing starts slowed 6.8% month-over-month in March, a greater deceleration than expected. In an industry note, Royce Mendes, director at CIBC World Markets, calls the slowdown “broad-based,” with a decline in housing starts in both the northeast and the west. The western region in the U.S. is, however, coming off a surge in starts in February, which means residential construction, at least, will be a winner in Q1.
But “the pull forward in some building activity could leave less room for gains in the months ahead,” says Mendes.
Katherine Judge, economic analyst at TD Bank, says in a data release that the deceleration is likely to be recouped as the weather turns warmer, bolstered by persistently strong job gains.
Meanwhile, industrial production figures show a 0.5% increase month-over-month in March, but most of that was a weather-related gain for utilities, says Mendes, noting mining stalled at 0.1% after a strong February, and manufacturing fell 0.4%.
It’s the first decline in manufacturing output since last April, says Derek Holt, vice-president and head of capital markets economics at Scotiabank, in an economics update. “So hold off on the alarm bells.”
Shenfeld expects that the soft U.S. economic indicators for the quarter will give rise to better results in Q2.
Read the full CIBC report.