Weekly market strategy

Big Picture

All eyes on Crimean referendum

The crisis in Ukraine took center stage this week ahead of Sunday’s referendum to determine if Crimea will secede from the country and join Russia. The US has said it will not recognize the breakup of the country and has threatened a wide range of economic sanctions against Russia if it comes to pass. Germany also warned Russia Thursday over Ukraine saying the Kremlin’s actions could lead to diplomatic and economic retaliation from Europe. Another worry weighing on the market was flagging Chinese growth after industrial output and retail sales numbers missed estimates Thursday. Those misses come on the heels of last weekend’s weak export number which came in 18% lower y-o-y for February. The news was more upbeat closer to home as US jobless claims dropped to the lowest level since November falling 9,000 to 315,000. The median forecasts called for an increase to 330,000. Retail sales for the world’s largest economy also rose in February by 0.3%, following a 0.6% drop in January. Meantime, the EU released a common framework with which to assess the assets of 128 of Europe’s largest banks. The framework is just one part of a larger effort by the single-currency union to unwind bad banks, determine who picks up the tab and establish a supervisor for all euro banks. The ultimate goal is to break the link between banks and governments and restore credibility to the region’s banking sector. In Canada, the Harper government signed off on a free-trade agreement with South Korea eliminating duties on 98% of all goods.

 

Markets

Stocks step back

Stocks stepped back for the four-day period covered in this report with the Dow losing 344 pts. to finish at 16,108, the S&P 500 slipping 32 pts. to end at 1,846 and the Nasdaq shedding 76 pts. to settle at 4,260. The TSX outperformed major US indexes losing 49 pts. to end at 14,245 as traders bought up safe haven gold stocks.

 

Our Recommendations

It’s all about the banks this week

Equities

Himalaya Jain, Director, Portfolio Advisory Group wrote “Concerns about Chinese growth and geopolitical issues relating to Ukraine have resulted in reduced risk appetite. Recent US economic data has been encouraging and suggests segments of the economy are bouncing back from severe winter conditions, confirming that weather was the primary culprit behind softer data in January and February. With the S&P500 trading at 15.3x forward earnings, we expect the equity market to continue trading sideways in the near-term. In Canada, we view most equities as fairly valued at present, suggesting the need for investors to be more selective when seeking new investment opportunities. We continue to recommend carrying higher than average cash balances as equity markets are not as compelling as they were in 2013. Commodity markets have diverged in recent weeks, as China-related commodities like copper have slumped, while gold has rallied due to tensions between Ukraine and Russia. Although we are constructive on the outlook for the European economy, we are concerned that tensions regarding Ukraine/Russia could lead to further near-term under-performance in this region’s equity markets.”

 

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