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Investment Insights: Don’t cry over spilt milk

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

While news headlines continue to focus on U.S. politics, particularly the potential confirmation of Judge Brett Kavanaugh to the Supreme Court, trade news tied to NAFTA revisions emerged over the weekend.

Dairy farm in Canada, with field of cows in the foreground on a cloudy day.On Sunday night, just before the deadline, Canada joined the trade agreement already made between the U.S. and Mexico. The U.S.-Mexico-Canada Agreement, or USMCA, will officially replace NAFTA for governing trade in the region. The Canadian government settled the dispute by declaring a concession on a fairly divisive, but rarely considered commodity: milk.

A key part of the deal requires Canada to curtail the protectionist policies supporting its dairy industry, allowing the U.S. increased access to Canadian dairy consumers, and removing a pricing control Canadian dairy boards use to set production quotas. The move has already been lambasted by Canadian dairy farmers as too great of a compromise. While dairy was one of the most contentious topics in U.S.-Canada trade talks, there were other changes in the trade agreement affecting all three nations. These fairly modest adjustments included: revised vehicle manufacturing requirements; higher minimum wages for the automotive industry; and for the pharmaceutical industry, an increase from eight to 10 years of market protection from generic drugs.

Attention turned toward Europe once again as political arguments about the future of the European Union raised renewed concerns for investors. Italy’s EU membership has come back into question after the government announced it could have solved its budget issues if it had its own currency, a sentiment also expressed following the country’s most recent elections. An interesting trend has appeared in Europe as British officials near their Brexit deadline and may be reconsidering their referendum, while Italy could eventually move forward with their own. The 10-year Italian government bond yield jumped to a four year high of 3.45% following the comments.

The easing of trade tensions between North American trading partners sent the S&P 500 higher on the news, but other key risks have yet to subside. Our team has continuously reiterated that politics remain one of the largest risks to financial markets over the near to medium term. Today, Congress will review an old bill that was never enacted called the No Oil Producing and Exporting Cartels Act, or NOPEC Act. The bill could allow the U.S. to sue any of the countries belonging to the long-standing OPEC oil organization, known for setting prices and production quotas worldwide. Presently, the international political spectrum is fraught with potential changes that would likely have a lasting effect on the global economy.

Chart showing various market returns as of 10/2/18
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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

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