Last week was the worst performing week for the broader North American markets since the summer.
For the most part, equity markets have been led by the energy and materials sectors over the past two and a half months. The driving force behind this run up, in my opinion, has been China and their thirst for commodities and energy. When the latest inflation numbers were released from China last week revealed a larger than expected rise in inflation, the rest of the world took notice. Will the Chinese government continue to raise interest rates in the coming months to cool a red hot economy? This is the question on the minds of investors today.
If China were to raise rates, or continue to place lending restrictions on its major banks, will eventually cause a slowing of their economy, which will also lessen their demand for energy and commodities. Because China has been the main driving force pushing up the prices of these investments, an economic slowdown could signal an interim top for the prices in these sectors.
In my opinion, Canada -- considered by many analysts to be dominated by oil and mining exports -- could be significantly affected by the decisions made in China. If the price of commodities and oil were to fall significantly, I believe our currency could pull back as well. In my opinion, as go the commodities and oil trade, so goes our dollar. If the negative sentiment towards oil and materials were to be sustained for a large enough period of time, our days of dollar parity with the U.S. would be short lived.
In order to be knowledgeable about investing today, one has to follow world events. especially what’s going on in the world's two dominant economies, China and the U.S. This past week’s inflation reading out of China may produce some negative sentiments towards the broader North American equity markets, allowing investors to continue to take profits.
What I have been recommending to investors over the past year or so is to use pullbacks as an opportunity to buy into the market, since I believe things will continue to get better over time. If this past week ends up being something of a five or 10 per cent pullback, I recommend investors take advantage of it by looking for investments that may have run up a little too much recently, to now possibly buy. You might be able to pick up some bargains, especially in the areas hardest hit during a brief market pullback.
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Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.