Big Picture

Europe struggles to rekindle growth amid austerity

European Union leaders met in Belgium on Monday to discuss ways to rekindle growth and create jobs, as aggressive austerity measures have propelled many eurozone countries back into recession. The jobless rate in the eurozone hit 10.4% in December, a record high since the euro was introduced in 1998. Leaders of 25 out of 27 EU states adopted a treaty pledging to cut back on high deficits or face sanctions from the European Union. Greece’s banks and other private creditors want the European Central Bank (ECB) to join the bond swap being negotiated; however, the ECB insists on seeing the private-sector agreement before deciding on its strategy. The ECB holds an estimated €36-billion to €55-billion of Greek sovereign debt.

The U.K.’s Chancellor of the Exchequer lodged a complaint with U.S. Fed Chairman Ben Bernanke over the Volcker rule, part of the planned financial overhaul of U.S. banking laws. The chancellor claimed the rule would make it more difficult and costlier for banks to buy and sell foreign sovereign bonds, which could impair the ability of his country and others to sell their debt. The Bank of Canada’s Mark Carney also said the rule could hurt bond markets because of restrictions it places on the trading of foreign government securities, including Canadian government bonds. U.S. housing prices reached a new post-bubble low, with prices 33% below the 2006 peak.

Markets

U.S. data calms EU jitters

Stocks fell leading up to the EU summit as financial markets fretted over the lack of progress in the Greek debt talks and about Europe’s gloomy economic outlook. However, losses were recouped later in the week as a drop in U.S. jobless claims fueled optimism. Honda slashed its profit outlook to the lowest level in three years after a period of “unparalleled difficulty” including natural disasters in Japan and Thailand and a strong yen. Britain’s manufacturing sector unexpectedly returned to growth in January as orders rose for the first time in six months, with increased demand from Brazil, China, the Middle East and the United States.

The price of natural gas tumbled 17%, the biggest January loss in three years, as mild weather and increased production resulted in a supply glut of the heating fuel. Facebook announced its highly anticipated initial public offering of stock, as it seeks to raise US$5-billion in the largest Internet IPO ever. Facebook may command a valuation more than five times higher than Google. Data showing weak demand for business loans in the U.S. suggests a potential risk of deflation – a cycle of falling prices, slower growth and declining incomes.

Our Recommendation

Data supportive for equities but market vulnerable to short term pullback

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “While economic data in the U.S. continues to show modest improvements and earnings data has been fairly supportive, the market appears overbought.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “S&P 500 technicals are supportive and low bond yields still favour an equity overweight bias.”

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

Greek debt talks hit snag; U.S. may ease

Greek debt-restructuring talks hit an impasse on Tuesday as private sector creditors pushed for a higher interest rate on the new bonds, arguing they are already taking a 50% write-down on existing bonds worth US$265-billion. A debt restructuring agreement is a precondition for Greece to receive its next installment of aid to stave off bankruptcy. The IMF cut its forecast for global economic growth to 3.3%, from 4%, in 2012 and warned the European crisis could tip the world into recession if decisive action is not taken soon.

The U.S. Federal Reserve announced interest rates should remain low well into 2014 and Chairman Bernanke appeared open to another round of stimulus, noting that bond buying is “an option that is certainly on the table.” A report on the quality of jobs in Canada revealed more people turned to lower paying positions or became self-employed in 2011. According to Stats Canada, the number of self-employed Canadians increased twice as fast as those in paid employment. Full-time employment increased by 1.5% in 2011; however, low-paying jobs grew four times faster than high-paying jobs. Asia will lead the world economy in 2012 with 7% growth, led by China, India and Indonesia, according to the head of the Asian Development Bank.

Markets

Fed sparks optimism; gold, oil, treasuries rise

Commodities and government bonds rallied for a second day Thursday, while the U.S. dollar weakened, after the Federal Reserve pledged to keep interest rates low and said it is considering more bond purchases. Research In Motion shares fell 9% Monday as founders and co-CEOs Jim Balsillie and Mike Lazaridis resigned after 20 years at the helm, handing over the reins to the company’s COO, Thorsten Heins. Chesapeake Energy, the second-biggest natural-gas producer in the U.S., will cut production in an industry-wide effort to reduce a massive surplus that has depressed prices to 10-year lows. Natural gas prices jumped 10% on the news.

The price of oil rose above $100 as the Fed outlook fueled optimism for increased oil consumption. The International Energy Agency (IEA) expects crude prices to reach US$247 a barrel by 2035, almost twice the US$133 assumed by OPEC, citing rising marginal costs to meet increased demand. Apple had another blowout quarter, marking its largest quarterly earnings ever, with record sales of 37 million iPhones, 15.4 million iPads and 5.2 million Mac computers. The fourth quarter of 2011 saw a breathtaking 118% jump in profit, leaving the tech giant with nearly US$100-billion in cash. 

Our Recommendation

Outlook improving but equities appear short term overbought

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “Although investor risk appetite appears to be growing, in the short term equities are overbought and vulnerable to a modest pullback.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “on an absolute basis, the S&P 500 rally is looking overbought. Relative to bonds, however, we could witness further equity outperformance through Q1.”

Big Picture

IMF seeks US$600-billion boost in funds

The IMF is seeking to more than double its lending resources by raising US$600-billion to help countries deal with the fallout of the eurozone debt crisis, but the plan faces some resistance. The U.S. and Canada said that Europe must put up more of its own money to resolve the situation. IMF officials hope the G20 talks in Mexico this week can lay the groundwork for a deal. The World Bank slashed its outlook for the global economy, citing “significant headwinds” from Europe. Global gross domestic product was cut to 2.5% in 2012, versus a previous estimate of 3.6%.

The Bank of Canada (BoC) predicts that a European recession in 2012 will cost Canada $10-billion in lost output, and result in $700-billion in lost global output. The BoC held its key rate at 1%, noting: “the pace of growth going forward is expected to be more modest than previously envisaged.” The central bank estimates that Canada’s economy will expand by 2% this year and 2.8% in 2013. Claims for U.S. jobless benefits last week dropped to the lowest level in almost four years, pointing to an improvement in the U.S. job market. In the U.K., the jobless rate hit a 17-year high of 8.4%.

Markets

U.S. stocks near six-month high

The S&P 500 reached nearly a six-month high yesterday, as the stock market was buoyed by U.S. economic news as well as strong demand at Spanish and French government bond auctions amid hopes that the IMF would raise money to help resolve Europe’s debt crisis. Natural gas prices tumbled to near 10-year lows as mild temperatures dampened demand and supply surged as a result of advances in drilling technology. The International Energy Agency cut its oil-demand forecast and warned of the potential for zero oil growth in 2012 due to an economic slowdown.

The U.S. rejected a proposal for a $7-billion pipeline extending from the oilsands to Texas because there was not enough time to review an alternate route that would avoid Nebraska’s Ogallala Aquifer, a major source of fresh water. Prime Minister Harper and other officials said they believe TransCanada Corp.’s Keystone pipeline will eventually proceed, but that the rejection underlines the need to diversify markets. Currently, 99% of Canada’s oil exports go to the U.S. Canadian oil & gas producers will spend $67.3-billion in 2012 and $73.2-billion in 2013. Kodak filed for bankruptcy protection, as it pays the price for failing to embrace digital photography, a technology that it invented. EBay sales and profit topped analysts’ estimates.

Our Recommendation

Outlook remains cautiously optimistic

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “the market’s trading range is developing a more upward sloping trend, with higher lows and higher highs, so although there are opportunities to take profits, our emphasis is more on buying on pullbacks versus selling strength.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Hugo Ste-Marie says: “With the U.S. economy showing better momentum relative to Europe/Asia, companies with a domestic focus offer less earnings risk, in our view.”

Big Picture

German economy stalls; Italy, Spain raise debt

Germany’s economic growth averaged a robust 3% in 2011 – twice that of the U.S. and the rest of the eurozone – but a foreboding 0.25% contraction in the final quarter has prompted fears of a recession this year. Solid bond auctions in Italy and Spain saw borrowing costs fall, easing concerns the countries would struggle to finance their debts. The European Central Bank decided to leave its key interest rate at a record low of 1% after two straight cuts. The U.S. saw a burst of growth at the end of 2011, according to a Federal Reserve survey that said the final weeks of 2011 were the U.S. economy’s strongest since last spring. Economists predict the U.S. economy grew at a 3% pace in the last quarter, versus 1.8% in the summer.

U.S. retail sales rose less than projected in December, up a mere 0.1% following a 0.4% rise in November, suggesting that consumers did their holiday shopping early. New jobless claims climbed to a six-week high in the first week of January, believed to be the result of layoffs after temporary hiring for the holiday season. A backlash against the growing wealth gap, as seen in the Occupy movement and Middle East uprisings, threatens the advance of globalization, according to a report by the World Economic Forum. 

Markets

Stocks rally at start of new year

Strong U.S. economic data from late December lifted markets in the first week of the year. But Thursday, a higher-than-forecast increase in jobless claims put a damper on sentiment. A boom in traffic at CNR and CP, Canada’s two largest rail companies, may mean the country will outperform the growth outlook recently trimmed by economists and the Bank of Canada. A dramatic drop in U.S. foreclosure activity in 2011 was the result of delays in dealing with delinquent mortgages, according to a report by RealtyTrac in California, which expects foreclosures to rise again in 2012.

Global manufacturers are worried about a scarcity of minerals and metals they need to build everything from cellphones and jet planes to cars and trucks, according to a poll by PricewaterhouseCoopers. IBM set a new record in 2011, earning 6,180 U.S. patents, and was the company to receive the most U.S. patents for the 19th consecutive year. The price of orange juice futures surged 26% in six days amid worries that a recent cold snap in Florida had damaged crops and that the FDA will recall juice imported from Brazil, leading to a shortage.

Our Recommendation

Outlook remains cautiously optimistic

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “although weaker global economic growth has negative implications for commodity demand, if economic data continues to improve our conservative outlook may prove to be too cautious and there is likely greater upside potential in 2012 than downside risk.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “Our 2012 objective will be to raise cyclical exposure when easing monetary policy is extended, China’s PMI index bottoms, and the S&P 500 settles above its 200-day average.”

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.