Markets quiet on fiscal cliff silence

Big Picture

Markets quiet on fiscal cliff silence, China shows signs of stirring

Fiscal cliff talks went quiet after a Republican counter offer was flatly rejected by the White House Monday. The near week-long public silence – there have been private talks – left traders tentative and markets drifting.

There has been willingness on behalf of the Republicans to raise taxes on the wealthy – a significant concession – and Democrats have ceded that the highest marginal tax rate would not have to rise to match the Clinton-level era of 39.6%. It is hoped this modicum of moderation on both sides leads to something concrete as the clock is now ticking with only eight legislative days left before the Christmas break. Keep in mind, the previous important fiscal debate was concluded on the 17th of the month.

In China, the announcement of a modest but positive rise in its Purchasing Managers Index for October was well received. It moved from 50.2 to 50.6 – the highest level in seven months – which suggests the world’s number two economy may be summoning some strength. Europe is, however, going in the opposite direction as the ECB dramatically reduced GDP growth estimates for 2013 saying the bloc would contract 0.3% next year instead of growing 0.5%. In the US, it was more of the same with one downbeat report followed by an upbeat report. In this instance, it was a worse-than-expected read on factory activity on Monday and a better-than-expected read on jobless claims Thursday. As customary, the US employment report due out today (Dec. 7) will trump both in terms of importance and has the potential to move markets in the absence of fiscal cliff news.

Markets

The Dow was the only winner over a subdued four days

For the four-day period, the TSX fell 88 pts. to end at 12,151. South of the border, the Dow was the only winner adding 49 pts. to close at 13,074. The NASDAQ shed 21 pts. to finish at 2,989 while the S&P 500 gave back 3 pts. to end the Thursday session at 1,413.

Our Recommendation

Look through the fiscal cliff debate and buy equity market weakness

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group wrote: “our preference is for equities over bonds, and cyclicals over defensive stocks.  Given our constructive view toward the US economy, we recommend increased exposure to US equities.  Investors should be deploying excess cash balances, particularly during instances of weakness caused by fiscal cliff uncertainties.”
• Fixed income. Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – 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 – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
• Portfolio strategy. Scotiabank GBM Portfolio Strategist Vincent Delisle says: “The global economy is heading into 2013 with positive momentum, mainly in the United States and China, but Europe continues to weigh on global activity.”

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