Markets
Equity Market Commentary
Equity markets in Canada and the US began the week on a strong note, with the TSX Composite hitting record highs while the S&P 500 showed renewed risk appetite. The bullish sentiment extended beyond North America, as markets in Europe and parts of Asia also rallied. Optimism was largely fueled by the increasing likelihood of another Federal Reserve rate cut in December. This rate-cut outlook boosted precious metals throughout the week, with silver notching a record high and gold providing a specific
tailwind for the resource-heavy TSX. South of the border, the S&P 500 was led by the communication sector, closely followed by consumer discretionary, which benefited from the improved interest rate outlook.
The strength in communication services was driven by reports that Meta (Facebook) is in talks to spend billions on Alphabet’s (Google) AI chips (tensor processing units, or TPUs) to challenge Nvidia’s market dominance, alongside strong reviews of its latest
Gemini AI language model. While these developments helped lift Alphabet shares nearly 7% on the week, the potential chip shift specifically established TPUs as a viable alternative to Nvidia’s chips, sending Nvidia stock down 2.6% and dragging AMD and Qualcomm lower. In the consumer space, Best Buy climbed 5.3% after reporting earnings above expectations and hiking its full-year outlook. However, the CEO noted that customers remain resilient but deal-focused, reinforcing previous observations in
our last update from Walmart and Home Depot regarding price-conscious shoppers seeking value. Reflecting this cautious consumer sentiment, the US retail sales report missed estimates. The data highlights a diverging economy where lower-income
households are facing greater financial stress, while massive AI infrastructure spending emerges as a disproportionate driver of GDP growth.
In Canada, third quarter annualized GDP came well ahead of estimates at 2.6%. However, beneath this headline, household consumption fell an annualized 0.4%, adding to worries about consumer health. Prime Minister Mark Carney signed a deal
with Alberta to advance a new bitumen pipeline connecting the oilsands to B.C.’s north coast to diversify oil exports beyond the US. Though controversial for reversing a B.C. oil tanker ban, it signals that compromises will be necessary for Canada to protect its trade interests in the face of US tariffs.
Bond Market Commentary
In a shortened US holiday trading week, expectations solidified for a Federal Reserve (Fed) rate cut in December, with an 83% probability for a 25-basis-point reduction. Rate cut expectations were primarily driven by weaker US retail sales, declining consumer confidence, jobless claims, alongside dovish (support for lower interest rate) comments from Fed Governor Waller. In the corporate bond market, many Canadian bonds in defensive sectors such as health care and utilities (electrical) saw higher prices. In the third quarter, many investors purchased private credit funds, as illustrated by Morningstar Direct reporting strong net inflows into unlisted public business development companies
(BDCs), a 33% increase from the end of 2024. Software giant, Oracle, faced concerns over elevated artificial intelligence debt spending reflected by rising five-year credit default swap (CDS) spreads.
Some of Brookfield Asset Management's announced a bid to acquire National Storage REIT. In evaluating Brookfield’s debt profile, the company has a longer-term debt structure (given the nature of its long-term projects), with an average weighted corporate maturity of around 14 years. In other news, investors are increasingly putting money into private credit funds, particularly into BDCs. BDCs essentially lend money to smaller and mid-sized companies that might not have access to traditional financing. With heightened competition and a backdrop of a declining interest rate environment in the US, private credit managers may pursue riskier, higher-interest loans to maintain their fund returns. Private credit investors should carefully evaluate risks prior to investing, as illustrated with Renovo Home Partners, which recently filed for bankruptcy and prompted Blackrock to revise the value of its debt down to zero.
The rise in Oracle's five-year CDS price moved to its highest level since October 2022, and raised concerns over the tech giant's debt spending. A CDS serves as insurance on a borrower’s debt, with higher prices indicating increased credit risk perceptions. Oracle's recent borrowing spree—$18 billion in the US high-grade market in September and another $18 billion in November for a data centre project—reflects a broader trend of technology companies seeking debt to fund substantial artificial intelligence infrastructure projects. As Oracle continues to expand its Cloud services and AI offerings, this increased reliance on debt financing has prompted these bond buyers to demand higher
risk premiums.
Economic snapshot
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