Big Picture

Stocks press on 

Most major global equity markets continued their upward journeys this week despite less-than-inspired economic data.

In the US, weaker-than-forecast employment and housing numbers were the most disappointing releases of the week (Thursday) but as dismal as they were investors largely shrugged them off. In the case of employment data, the jump in the number of people filing jobless claims was the biggest one-week increase since November. It was a similar story with regard to housing numbers in which the number of starts for April declined 16.5%; far worse than expected and the weakest read since November. Also on Thursday, the Federal Reserve Bank of Philadelphia’s May index of business activity unexpectedly fell. As market watchers know a bit of not-so-good economic news south of the border isn’t such a bad thing especially if it’s combined with tame inflation as it was this week with a low CPI number release. Slower growth coupled with a lack of inflation suggests the Fed will continue with easy money policies and bond buying to prop up the economy, which is a nice tonic for the markets. Meantime, there was little to cheer about in the euro zone as France officially fell back into recession and Germany moved closer to a double-dip slump. Hopes both countries could play a role lifting up the weaker euro zone countries now appear distant if not lost altogether. Looking ahead, it is a quiet day (May 17) for economic releases and earnings announcements the last day before the holiday weekend.

Markets

Dow, S&P 500 stay in record territory

New York indexes rose for the four-day period covered in this report with the Dow and S&P 500 staying in record territory. The blue chip index rose 125 pts. to close at 15,233 Thursday after hitting a new high Wednesday. Notably, the S&P 500 has only had three down days the entire month with the third coming Thursday. Meanwhile, the Nasdaq advanced 29 pts. to close at 3,465. In Canada, the benchmark TSX fell 82 pts. to finish the four-day period at 12,507.

Scotia’s Recommendation

U.S. equities approaching fair value; Sector rotation could be next major theme

Equities - Caroline Escott, Director, PAG, wrote “U.S. equities continue to make new all-time highs as the markets benefit from the continued support of central bank’s monetary policy. This has been reinforced by a strong Q1 earnings season and largely constructive economic news, particularly for labour and housing. While the valuation level of the S&P500 is approaching fair value, it still remains reasonable at 14.9x forward EPS, while offering a dividend yield of +2%. While we believe there will be some consolidation of the recent gains in the near term, we believe downside will be limited to something in the range of 3% - 5%.”

Fixed Income - Andy Mystic, Director, PAG, wrote: “Although we continue to maintain an emphasis on shorter duration positioning, and an overweighting of corporate credit, the potential impact of these broader macro trends is opening the prospect of selective/modest term extension for those investors willing to take on interest rate risk. Although we view higher yielding credits as generally rich at current levels, supply expectations, the renewed rally in rates, and continued demand for yield in a low rate environment will likely work to keep pricing steady as larger coupons remain attractive. For the more risk averse, GICs continue to offer the best relative value.”

Preferred Shares - Tara Quinn, Director, PAG, wrote: “If investors are interested in holding a bank floating rate preferred share, they should look at the various 2013 rate resets which have the potential of being converted into a floating rate preferred share. Each security has a different floating rate spread which will impact how the security trades and each spread should be evaluated closely. It is also recommended that investors choose a security which fits within their current portfolio.”

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.

Big Picture

Stocks on cruise control

Global equity markets continued to march higher amid a relatively quiet but upbeat week for news and economic releases.

Once again it was jobs data from south of the border that helped fuel positive sentiment and bring out the buyers as stronger-than-expected labour figures were released Thursday. The figures showed a drop in the number of jobless claims last week with the number coming in at 323,000 versus an expected rise to 335,000. The 323,000 figure stands as the lowest in five years which added to the buoyant tone set last Friday after a much stronger-then-expected payroll report was released. Since then, major benchmarks in the US have set records as has the German DAX and Japanese Nikkei. Adding to the positive backdrop was trade data out of China on Tuesday that helped ease concerns over slumping economic growth in the PRC. The country posted a trade surplus of $US18.16 billion in April versus expectations of $US15.55 billion with export growth coming in at 14.7% and import growth at 16.8%. Both figures exceeded forecasts which helped inspire a mini commodities rally. The sector participated in the move up this week; a welcome sign that the current surge may be broadening to less defensive areas of the market. Looking ahead, Fed Chairman Bernanke speaks this morning (May 10) and the market will, as always, parse his words to try to get a read on future stimulus moves.

Markets

New highs and fresh records for New York

The Dow and S&P 500 made headlines this week with both reaching all-time highs and the Dow clearing the 15,000 pt. hurdle Tuesday. For the four-day period, the Dow rose 109 pts. to end Thursday at 15,082, the S&P 500 rose 12 pts. to finish at 1,626 and the Nasdaq advanced 31pts. to close at 3,409. In Canada, the S&P/TSX also notched a high on the week – albeit one that’s only about a month old but a high nonetheless – as the benchmark gained 105 pts. to end at 12,543.

Scotia’s Recommendation

U.S. equities approaching fair value; Sector rotation could be next major theme

• Equities. Himalaya Jain, Director, PAG, wrote “As risk appetite improves, defensive sectors such as Telecom, Consumer Staples and Utilities could come under pressure. The ECB rate cut and better economic data from the US and China have improved the sentiment on commodities. While we would like to see further confirmation that China’s economy is accelerating, it appears the worst may be over for many Canadian resource companies. We continue to like selective energy names in Canada and think that base metal mining stocks may have bottomed. We continue to avoid gold equities.”

• Fixed Income. Andy Mystic, Director, PAG, wrote: “Although we continue to maintain an emphasis on shorter duration positioning, and an over-weighting of corporate credit, the potential impact of these broader macro trends is opening the prospect of selective/modest term extension for those investors willing to take on interest rate risk. Although we view higher yielding credits as generally rich at current levels, supply expectations, the renewed rally in rates, and continued demand for yield in a low rate environment will likely work to keep pricing steady as larger coupons remain attractive. For the more risk averse, GICs continue to offer the best relative value.”

• Preferred Shares. Tara Quinn, Director, PAG, wrote: “If you thought the preferred share market was expensive before and were waiting for a pullback - you might be waiting a while longer. It is our view that those preferred shares will continue to be well bid as investors continue to flock to quality dividend paying preferred shares as a source of stable yield. It should also be noted that of the top 10 ETF Fund Inflows last week - three were preferred share ETFs. As a reminder, ETFs post the current yield of the portfolio which may overstate the return if the fund is purchasing preferred shares at a premium in the marketplace.”

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.

Big Picture

Central bankers lift sentiment, markets

It was a bumpy week for most major equity markets but they were able to advance through Thursday thanks to central bankers’ actions in Europe and south of the border.

In Europe, the ECB did what it hadn’t done for 10 months – cut interest rates. The benchmark rate for the 17-member eurozone now stands at .5% after the central bank cut by 25 bps., or a quarter of a percentage point. The move, which had been expected and is largely symbolic, helped turn sentiment and markets around after Wednesday’s triple-digit losses. The rate cut came one day after lower levels of manufacturing were announced in the US and China; the primary cause of Wednesday’s slide. In the PRC, a purchasing managers index fell to 50.6 in April from 50.9 in March indicating a slowdown in manufacturing activity while ISM data out of the US also pointed to decelerating manufacturing south of the border. The disappointing read on US manufacturing was tempered by the Fed’s announcement to adjust bond purchases – increasing or decreasing – depending on job market and inflation data. Separately, the Canadian economy performed better than expected as GDP grew .3% in February topping expectations for .2%, which translates into 1.7% annualized growth. And finally, the Bank of Canada announced late Thursday that Stephen Poloz will replace Mark Carney as Governor. Look to US payroll numbers to be a potential market mover today (May 3) after their release Friday morning.

Markets

Bay, Wall Streets gain

North American markets ended the four-day period solidly higher with the TSX leading the way points-wise with 146 pts. gain to close Thursday at 12,379. New York also posted solid gains with the Dow rising 109 pts. to finish at 14,831, the S&P 500 advanced 14 pts. to end at 1,597 while the Nasdaq jumped 57 pts. to end at 3,340.

Scotia’s Recommendation

Time for a breather; Recommend modest temporary reduction in equity exposure

• Equities - Himalaya Jain, Director, PAG, wrote “Although US Q1 corporate earnings have been better than expected; full-year consensus estimates haven’t changed much suggesting that additional evidence showing economic improvement is needed before investors boost risk appetite. The much, anticipated “great rotation” from bonds into equities has been delayed (not derailed) by incremental quantitative easing (QE), implying that further near-term P/E expansion for US equities may be limited. We continue to prefer US equities over Canada. Within Canada, we see good value in the energy sector and select financial names, while the REIT, utility, and telco sectors appear expensive.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: “The impact of current and potential quantitative easing programs globally is raising the prospect of lower yields once again – particularly as the currencies of developed nations weaken and seemingly fence in the growth prospects of developing nations. Although we continue to maintain an emphasis on shorter duration positioning, and an over-weighting of corporate credit, the potential impact of these broader macro trends is opening the prospect of selective/modest term extension for those investors willing to take on interest rate risk. We will be watching the Fed’s statement closely at the next monetary policy meeting in order to gauge the Fed’s appetite for further QE.”
• Preferred Shares - Tara Quinn, Director, PAG, wrote: “With both the equity and bond markets rallying in recent days, it has become challenging to gauge the near-term direction for preferreds. It’s our view that in the long run, benchmark yields may eventually rise putting downward price pressure on preferred shares.”

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.

Big Picture

Stocks slump on growth fears

It was a tough week for stock markets around the world with many registering their biggest point declines in months.

The trigger lay in re-ignited fears over slowing global growth in two of the world’s three economic engines. On Monday, China surprised with weaker GDP growth than expected as the country grew 7.7% year-over-year in the first quarter down from 7.9% in the fourth quarter. Decelerating industrial output in China also disappointed investors who turned to the sell button in response. Word the IMF was cutting its global economic forecast for growth added to the worries as did leading economic indicators south of the border which came in below expectations on Thursday. The March Philadelphia Fed Survey's general business conditions index came in at 1.3, far below the 3.3 reading economists had forecast. Earlier in the week, the New York Fed’s Empire State index of manufacturing activity also slipped more than expected. Meantime, lackluster earnings south of the border had investors on the defensive as top-line results have been uninspiring even if bottom-line numbers are beating. Of the S&P 500 stocks that have reported first-quarter results to end of day Wednesday, 71% have beaten analysts' predictions on earnings but only 52% have done it on sales.

Markets

US and Canadian markets register sharp losses

Major indexes north and south of the border lost ground with the pain a little more acute in Canada as the commodity complex took it on the chin. This was particularly true of gold which notched its biggest one-day price decline in 30 years on Monday; oil prices also retreated. For the four-day period, the TSX shed 341pts. to end Thursday at 11,996. South of the border, the Dow fell 328 pts. to close at 14,537, the S&P 500 gave back 47 pts. to finish at 1,541and Nasdaq lost 128 pts. to close at 3,166.

Scotia’s Recommendation

Headline economic indicators moderate; looking to Q1 corporate earnings as next catalyst

• Equities - Himalaya Jain, Director, PAG, wrote “Although we are maintaining our preference for equities, our near-term enthusiasm is being tested by weaker than expected economic indicators. Some of the weakness could be temporary (U.S.), while some may have longer duration than we initially anticipated (Europe). China’s growth demands close monitoring, but we remain of the view that its growth should accelerate toward year-end. Although U.S. corporate earnings are off to a good start, we are raising our caution level one notch as we expect equity market returns to be modest over the next two to four months. We expect Canada to continue underperforming until the dual overhang of a cooling housing market and weak commodity environment clears.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: “Following the disappointing March non-farm payrolls and this week’s sell-off in gold, US 10-year treasuries have fallen below their 200-day moving average and into a new trading range – with US 10-years now trading around 1.72%. We think it makes sense to evaluate fixed income exposure as to weighting and duration as the next logical strategic asset mix shift being a reduction of fixed income holdings and shortening of portfolio duration”
• Preferred - Tara Quinn, Director, PAG, wrote: “For the second week in a row the preferred share market started to retreat slightly as spreads on non-investment securities widened. Our recommendation in this environment continues to be focused on investment grade securities which provide an attractive dividend to holders. The floating rate sector of the market also looks attractive. Although we are not expecting a large move in the short end of the yield curve in the near term, we are expecting higher rates in the future and the floating rate sector should perform well in a rising interest rate environment.”

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.