Big Picture

Global equity markets rally; China turns to growth; Spanish bonds well-bid

A global equity market rally took hold this week largely driven by expectations of further economic stimulus by central bankers around the world. And although traders did not get everything they wished for it was enough to sustain gains through Thursday.

In the US, Fed Chairman Bernanke said in testimony before Congress that he wasn’t convinced growth was slowing to the point that new measures to stimulate were necessary at this time. This took the edge off some of the gains but news of a Chinese 25 bps. rate cut provided a balm for investors as the country reduced interest rates from 6.56% to 6.31%; the first cut since 2008. The PBoC also announced it will pay less on bank deposits dropping the rate from 3.5% to 3.25%. The move signals a move in Chinese economic policy to one of growth.

In Europe, the ECB chief said some of the central bank’s 23 members had argued for an interest rate cut in advance of Wednesday’s decision to stand pat on rates. The nod to the bank’s bias toward a rate cut suggests it may happen sooner rather than later. The central bank also promised to continue to provide EU commercial banks with effectively unlimited low-interest loans, at least through the end of 2012. While European leaders continued to huddle in an attempt to solve Spain’s growing bank problems, some relief came in the form of a well-bid Madrid bond auction in which 10-year Spanish bond yields fell to 6.04%, which is below secondary market rates.

Markets

North American stocks surge, best daily showings for NY bourses in 2012

The S&P/TSX put on its best showing in many weeks with the benchmark index advancing 232 pts. from 11,360 Monday to 11,592 at close Thursday. Crude oil and gold staged impressive rallies this week in advance of the Fed statement but with Bernanke standing pat, the gains were pared back.

US markets also surged with the Dow, S&P 500 and Nasdaq notching their biggest daily gains of the year Wednesday. For the four-day period, the Dow jumped from 12,118 to 12,460, the S&P 500 advanced from 1,278 to 1,314 and the Nasdaq moved from 2,748 to 2,831.

Our Recommendation

Change in China’s policy stance is supportive of commodities

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Recognizing there is still downside risk to equities given all the macro factors weighing on investor sentiment, there are many stocks we find fundamentally attractive at current valuations and recommend buying.”

• 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: “China lending rate cuts mean the ongoing 14-month TSX/mining/energy underperformance is entering the very late stages.”