Big Picture

All eyes on banks, investors pessimistic on central bank efforts

The Libor scandal this week placed global banks under renewed scrutiny, with the number of institutions caught in the widening net of the investigation growing as regulators in the US, Canada, Europe and Asia piece together the extent of the manipulation in the key lending rate. Already, some are pointing to the scandal as being potentially one of the most costly and consequential in the history of banking.

Against this backdrop is the growing unease of investors in the ability of central banks to stimulate growth amid what seems to be a constant barrage of economic setbacks. Rate cuts by both the central banks of Brazil and South Korea added to recent moves by the European Central Bank to cut its overnight rate to 0.75 per cent, and the People’s Bank of China in making its second cut in the past two months to its key rate. Italy passed a tough market test on Friday as its three-year borrowing costs fell below five per cent at an auction hours after a surprise cut by Moody’s to the country’s sovereign debt rating to two notches above junk status—Baa2. China’s growth rate, meanwhile, skidded for a sixth successive quarter to its slowest pace in more than three years. In Canada, the central bank is expected to hold its benchmark rate at 1 per cent next week.

Investors reacted largely negatively to these efforts throughout the week, with markets falling until Thursday. However, by Friday morning, global markets appeared to be showing signs of recovery.

Markets

Global markets surge to end the week

Global stocks rallied on Friday, ending the longest slump since November, as JPMorgan Chase & Co. was sharply higher after reporting earnings. Chief Executive Jamie Dimon said the bank still is likely to post record earnings this year even after reporting a $4.4 billion trading loss from its chief investment office in the second quarter.

The S&P 500 rebounded following six days of losses, the longest period of losses in almost two months. The S&P 500 was up over 18 points (1.38%) by mid-day Friday; the Dow was up over 170 points (1.36%), while the S&P/TSX Composite Index was up over 80 points (0.7%). The TSX continued to gain ground against the Dow for the week, closing even further the performance gap with the US on rising commodity markets.

Our Recommendation

China, Europe, and the U.S. all expected to boost stimulus efforts

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “longer term investors should be buying selectively, particularly in the Energy and Materials sectors and U.S. Industrials which are largely oversold.”

• 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: “ in our view, bonds are pricing in a lot bad news, and equity downside risks (weaker GDP, negative earnings revisions, fiscal cliff) are somewhat offset by compelling relative valuations and a global easing.”

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.