Big Picture

ECB pledges to defend euro as worries multiply, US earnings modest

Further signs of weakness appeared in Europe this week but just as the worries multiplied, the ECB stood up and said it would do everything in its power to preserve the euro.

The statement – viewed as an acknowledgement the ECB would intervene in bond markets and resume buying Spanish and Italian debt – produced the intended effect: yields fell in both countries and equity markets cheered. Prior to the statement, Spain’s interest rate on ten-year government debt soared well above 7% hitting its highest levels since the 1999 establishment of the euro. Additionally, there was growing speculation that Greece was, once again, on track to exit the euro zone due to its failure to meet austerity requirements linked to bailout monies. Meanwhile, Moody’s cut its credit outlook for Germany, the Netherlands and Luxembourg to negative from stable Monday, a sign troubles continue to spread in the region. UK second-quarter GDP figures also released this week pointed to a recession that’s getting worse and German business confidence fell across all sectors.

Closer to home, US Q2 earnings season remains in full swing. While earnings have been modestly supportive with a positive S&P 500 beat ratio, the higher-than-forecast number has been built on improving margins as sales growth has been poor. Sales, on average, have risen just 2.9% in Q2; the weakest increase since Q3, 2009. Worse, many big companies linked to global growth are missing revenue targets; another sign of the slowing world economy.

Markets

US markets end mostly positive, TSX rises on energy, gold stocks

Energy and gold sectors lifted the TSX this week as a proposed Chinese buyout of a Canadian crude producer lifted energy shares. Gold stocks rallied on renewed hopes for economic stimulus and further potential ECB money printing. For the four-day period, the TSX added 16 pts. to end Thursday at 11,623. US indexes recovered from early week losses with the Dow gaining 64 pts. to 12,887 from Monday open to Thursday close while the S&P 500 slipped 2 pts. to end at 1,360.

Our Recommendation

Equities still preferred asset class, but expected to remain range-bound

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Although we can still find certain sectors and individual companies which offer compelling value, technical indicators suggest that while we have probably seen the market bottom, a re-test of recent lows would not be a surprise.  Longer-term investors should be buying selectively, particularly in the Energy and Materials sectors in Canada, and U.S. Industrials, Technology, and Financials.”
• 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: “the true benefits of easing arise when economic data stop deteriorating. Looking at current trends in U.S. and Chinese indicators, macroeconomic momentum remains challenging.”

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