Global risk assets endured one of the toughest weeks of 2019, highlighted by the FOMC policy decision and renewed U.S. – China trade tensions. The FOMC decided to cut the Fed funds rate by 25bp, but Fed Chair Powell’s comments were more hawkish than expected, citing the move as an “insurance cut” in order to protect against trade tensions while the US economy continues to grow steadily. Following the FOMC decision, President Trump surprised the market with a new round of tariffs on $300bn of Chinese goods. Equities reacted negatively to the news while credit widened by 10-15 bp. Investors piled into Treasuries following the tariff announcement, dragging the US 10y yield down from 20bp to 1.85% by Friday’s close. As a result of the tariffs, the chances of another rate cut increased substantially, putting Fed Powell in a hard place for the upcoming September meeting.
The renewed trade war also affected Canadian credit, although to a lesser degree. Domestic names widened out by 5-8 bp, highlighted by higher beta sectors like REITs and Hybrids. In general, the lack of issuance in our domestic market as well as decent earnings have kept spreads intact compared to the U.S. counterparts.