Big Picture

Greece set to get bailout, Fed mulls QE3, Moody’s puts RBC on notice

Euro sovereign debt concerns pushed their way back into the headlines this week over the possible unraveling of a second bailout for Greece. China’s pledge to invest in Europe’s rescue funds and keep buying EU debt issues buoyed sentiment, as did news of an ECB Greek bond swap and reports that a bailout deal would get done.

Closer to home, President Obama released his 2013 budget plan Monday projecting a US$901 billion deficit. The budget calls for raising $1.5 trillion over 10 years from the wealthiest taxpayers and, for the first time, higher taxes on dividend income of the wealthiest taxpayers. Meantime, the Fed released minutes from its January meeting revealing discord among bank governors over the possibility of renewed bond purchases or QE3 to support economic growth.

In the Middle East, Iranian sabre rattling raised the spectre of disrupted global oil supplies pushing the price of crude above US$100 a barrel. The prospect of costlier oil re-ignited fears it could damage the fragile U.S. economic recovery. Moody’s Investors Service was busy this week cutting the debt ratings of six EU countries on Monday and put Austria, France and the U.K. on notice their top ratings may be next. Moody’s also threatened to downgrade over 100 financial institutions, including RBC, due to high capital markets exposure and low expectations for growth.

Markets

North American equities power forward, Dow hits highest level since 2008

The 2012 rally south of the border continued this week thanks to positive Greek bailout news and good US jobs and housing numbers. US major indexes remain firmly in the black for Q1 with the Dow nearing four-year highs, the S&P 500 edging closer to its 2011 high and the Nasdaq Composite reaching its highest level in 11 years.

In Canada, the S&P/TSX Composite also had a positive week on the back of rising commodity prices – particularly crude oil and gold – but still has a ways to go to surpass its 52-week high of 14,329 points set March 7, 2011.

Our Recommendation

Outlook improving but equities appear short term overbought

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Although equities appear overbought in the short term, any pause or consolidation in the market should be seen as a buying opportunity.”

• 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: “As leading indicators bottom in Europe and turn positive in the U.S., P/E [multiples] could surprise investors throughout 2012.”

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