Big Picture

Spanish banks stoke euro concerns, China to spur growth, US economy softens

Greek opinion polls that showed pro-austerity political parties in the lead ahead of the June 17 election provided some modest support to equity markets early this week, as did word of new – albeit modest – Chinese stimulus spending. However, the gains were short lived as Spain and its beleaguered banks became the focus of attention in the euro zone.

Spanish banks came into the spotlight after the government announced it would have to bailout the third largest bank by assets last Friday. The problem, however, is that Spain lacks the necessary funds to recapitalize the bank. The developments sent borrowing costs for Spanish ten-year bonds to fresh 2012 highs this week. Yields inched close to 7% leading to worries that a Spanish bailout could bring current euro resources to the breaking point.

Meanwhile in China, the government announced new infrastructure spending to spur growth as first-quarter GDP came in at 8.1%; the slowest showing for China since the financial crisis. India’s GDP also contracted to a multi-year low of 5.3% in Q1. In the US, economic data continues to soften. Q1 GDP was revised downward to an annual rate of 1.9%, consumer confidence numbers fell in May to their lowest level in four months and new claims for unemployment benefits rose this week.

Markets

North American stocks close out a dismal May

The S&P/TSX Composite closed out the month of May on an up note rising 79 points on the last day of trading Thursday. For the year, the TSX is off 3.7% with the majority of the losses coming in the past 30 days as Europe’s escalating debt crisis prompted investors to sell risk-related assets and take refuge in the US dollar and treasuries.

May was also a difficult month for New York markets. The Dow, S&P 500 and Nasdaq all lost ground with each index off about 6% for the 30-day period. Even in light of the difficulties, US indexes remain positive for the year with the Dow up 1.4%, the S&P 500 up 4.1% and the Nasdaq up 8.5%.

Our Recommendation

Market sell-off setting up a longer-term buying opportunity

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “We think the Canadian market is approaching a bottom, and many stocks, particularly in the resource sector, are trading at attractive valuations.”

• Fixed income. Andrew Mystic, Associate Director, 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: “Extreme panic selling should eventually represent a compelling tactical opportunity to raise cyclical exposure.”

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