Big Picture

Stocks interrupted

Equity markets around the world had a rough go of it this week as investors fretted over mixed economic data and the timing of stimulus reduction in the US.

The decision as to when the Federal Reserve will pare back its stimulus program has hung over the markets since May 22. That’s when Fed Chairman Bernanke said the change could come in the “next few (Fed) meetings.” Since then, a fair bit of volatility has crept back into the markets. Steep losses in Japan, as well as market pullbacks in Europe and North America have not helped the mood, nor have rising bond yields. Counter intuitively, weak economic reports have provided some support to equity benchmarks as investors take the so-so data as a sign the Fed will continue with its bond-buying program. Some of the downbeat numbers this week came from productivity, manufacturing and factory orders reports. All fell or missed expectations. The key report of the week, however, is the monthly jobs report from the US Labor Department which is issued the first Friday of every month. The jobs market remains the focus for the Fed which is congressionally mandated to do what it can to keep Americans working. Depending upon the results, the report has the potential to move markets although consensus says it – like the rest of the week’s data – will be mixed.

Markets

Benchmarks lose footing

The market turbulence took its toll on North American equity benchmarks with the TSX falling 241 pts. to end Thursday at 12,409. South of the border, the Dow shed 75 pts. to settle at 15,040, the S&P 500 lost 8 pts. to finish at 1,622 and the Nasdaq dropped 31 pts. to end at 3,424.

Scotia’s Recommendation

Investors remain focused on economic data and the macro environment

• Equities - Caroline Escott, Director, PAG, wrote: Equity markets have been driven by economic data this week as investors remain focused on how and when the Federal Reserve will unwind its quantitative easing program (QE). We believe that the Fed recognizes that a disorderly unwinding of QE is a risk to capital markets and as such the Fed will continue to be clear and transparent in the communication of its policy. The recent trend of sector rotation out of defensive sectors and into cyclical sectors also reversed this week with the defensive sectors outperforming the cyclical sectors on the back of a small decline in bond yields mid-week. Nevertheless, we believe that the sector rotation theme from defensives into cyclicals will continue to play out if U.S. labour and housing markets maintain their current momentum. We continue to expect Canadian equities will remain range bound in the near term.
• Preferred Shares - Tara Quinn, Director, PAG, wrote: The preferred share market has started to feel the pressure of rising benchmark yields and prices have started to trend lower in this environment. The securities that have been affected the most are the low-dividend, non-bank perpetual preferred shares which are unlikely to be redeemed by the issuer. It is expected that these types of perpetual securities will continue to be under pressure should the 30-year Government of Canada bond yield continue to climb higher. Investors should evaluate their exposure to the perpetual market at this time and consider reducing exposure to this sector.
• Fixed Income - Andy Mystic, Director, PAG, wrote: Bond markets have vacillated this week as rate volatility has increased within the context of the Fed’s emphatic “data dependent” decision making framework. On the back of mixed US economic data this week, we saw the US 10-year Treasury start the week at 2.18%, then touch 2.0%, before finally selling back off to 2.15% on stronger non-farm payrolls data.  We continue to expect some rate volatility through the summer as bonds react more forcefully to economic data – having said that – we continue to expect that volatility will remain within prescribed ranges before rate risks begin to mount heading into the fall.   For this reason we continue to urge investors to carefully evaluate their fixed income exposures, remaining overweight credit and shorter duration.”

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 regain footing, inch higher

Most major equity markets advanced on the week brushing aside mixed US economic data and a big slide in Japanese stocks.

In Japan, the benchmark Nikkei index has shed more than 13% since May 22 taking it into official correction territory. The big move down has not rippled into other global markets as the losses are primarily being attributed to profit-taking. The Nikkei has been on fire over the last six months with the index rising about 70% from mid-November through mid-May. Closer to home, US first-quarter GDP came in at an annualized 2.4% Thursday which was revised down from earlier estimates of 2.5%. The downward revision on what was already a so-so estimate is another sign of the slow, halting US economic recovery; the weakest on record since WW II. This was further evidenced by data showing the number of people filing for first-time jobless benefits rising for the third week in a row, a blow to hopes for more sustained jobs improvement. Investors did, however, take solace in strong housing and consumer confidence numbers released after Memorial Day. Home prices across the US rose on average 10.9% from a year earlier, the largest gain in seven years (home prices are still down an average 28% across America from their 2006 peak). In addition to the positive housing numbers there was also good news in May’s consumer confidence data with the headline read coming in at 76.2 up from 69 in April. That’s the highest the gauge has been since February 2008 which led to spirited buying Tuesday after US markets re-opened following the holiday weekend.

Markets

Toronto, New York up on the month and year

With one trading day left in May the big North American indexes are on course to end the month in positive territory. Indexes also remain positive for the year with the TSX composite up 2.52%, the Dow up 16.94%, the S&P 500 up 16.0% and the Nasdaq higher by 15.62%. For the four-day period covered in this report, the TSX was up 79 pts. to finish at 12,746, the Dow rose 21 pts. to end at 15,324, the S&P 500 gained 5 pts. to close at 1,654 and the Nasdaq rose 32 pts. to settle at 3,491.

Scotia’s Recommendation

Keep one eye on the golf ball, and the other eye on incoming data

• Equities - Himalaya Jain, Director, PAG, wrote “With earnings season now over and US equities trading close to fair value, we expect near-term equity direction will be driven by incoming economic data as the Fed deliberates a potential unwinding of quantitative easing (QE). Recognizing that the greatest perceived risk to capital markets is a disorderly unwinding of QE, we expect the Fed will continue to be clear and transparent in the communication of its policy. Assuming an orderly unwinding of QE in the coming months or quarters, we believe US equities should outperform most other asset classes. We have started to witness early signs of sector rotation from defensives into cyclicals within the US equity market, a trend we think should continue if US labour and housing markets maintain their current momentum. We expect Canadian equities to remain range bound in the near term.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: Following Chairman Bernanke’s initially dovish comments he noted that the Fed could begin to reduce asset purchases over the course of the next few Fed meetings, if the Committee was confident that labour market improvements were sustainable. These comments, along with the plethora of competing views from other Fed speakers last week, will likely encourage a greater degree of bond market volatility going forward. Although we continue to believe that bonds will likely remain range bound through the summer, the current monetary policy backdrop is shaping up to be not particularly hospitable to bonds going into Q4/13 – particularly if the US data continues on a positive footing. For this reason we continue to urge investors to carefully evaluate their fixed income exposures, remaining overweight credit and shorter duration.”

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 run into headwinds

Global equity markets looked vulnerable for the first time in many weeks as investors contemplated life without the Fed and a slower growing China.

Fears the US Federal Reserve will reduce its stimulus program were triggered after Fed Chairman Bernanke spoke Wednesday and minutes from the last Fed meeting were released. Both showed the Fed is contemplating a pullback in bond buying and the change could come in “the next few meetings.” The decision to pare back purchases is, Bernanke said, data determined – data that shows real and sustained growth in the labour market. This is something he said months ago and the employment market has been getting better. Figures released Thursday morning signaled this again as the number of people filing for jobless benefits fell more than expected. The challenge for the Fed is that the improvements have been halting and achingly slow. That leaves investors guessing as to exactly when, and by how much, the Fed may taper asset purchases which led to market uncertainty. The second negative on the week was disappointing Chinese manufacturing data. The numbers were contained in a purchasing managers index that fell to a seven-month low of 49.6 in May from 50.4 in April. The fall was worse than expected and signaled a contraction in Chinese manufacturing activity. The news sent a chill through most markets but Japanese equities were hit the hardest falling more than 7% - the biggest one-day drop since the 2011 Tsunami.

Markets

North American markets show resolve

The big fall in Japanese equities rippled through Europe mid-week but by market close Thursday, US and Canadian equities had held up quite well. For the holiday shortened three-day period the TSX fell 11 pts. to end at 12,658. South of the border and over four days, the Dow fell 60 pts. to finish Thursday at 15,294, the S&P 500 shed 17 pts. to close at 1,650 and the Nasdaq fell 39 pts. to end at 3,459.

Scotia’s Recommendation

Expect consolidation in equities to be contained as underlying fundamentals remain supportive

• Equities - Caroline Escott, Director, PAG, wrote “The S&P 500 has consolidated some of its recent gains, declining approximately 1.7% this week. While we believe it may correct further, we believe it will be modest and something in the range of 3%-5%. We remain constructive on US equities as we expect jobless claims to continue to improve, equity flows to continue to recover, and continued strength in the housing market. As noted last week, while the valuation of the S&P500 is approaching fair value, it remains reasonable at approximately 14.9x earnings, while offering a dividend yield of +2%. In addition, we have seen a positive reversal in equity mutual funds flows with US equity mutual fund inflows of US$72 billion YTD, which will provide additional support to equities.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: “The seemingly antithetical comments from Chairman Bernanke left the US 10-year whipping back and forth within a 15 basis point range before finally settling at its recent high of 2.02%.  With the Fed signalling the potential for stimulus withdrawal and US data continuing to surprise to the upside, we believe bond investors should be looking closely at their fixed income holdings.  Although bonds will likely remain range bound through the summer, Q4/13 is increasingly shaping up to be an important juncture for bonds.  We continue to recommend that investors remain overweight spread product and remain shorter duration.”
• Preferred Shares - Tara Quinn, Director, PAG, wrote: “The preferred share market has been range bound and continues to trade in a sideways manner as of late. This week National Bank announced its intention to redeem its Series 21 rate reset which has its first reset/call date on August 16, 2013 and a reset spread of +2.05%. This announcement highlights that the decision to call/extend the upcoming rate resets will depend not only on the reset spread but also on the individual company and its existing capital structure.”

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 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.