Paths to new highs will have to wait
Markets took a breather this week as political worries rose in Europe and US economic data softened.
In the US, initial jobless claims declined last week to 366,000 which was good but the expected number was 360,000; a slight negative. Even with the disappointment, however, the four-week moving average is at levels not seen since 2008. Fourth-quarter productivity also declined more than expected with a 2.0% pullback versus an expected 1.6% fall. Unit labour costs also rose higher than expected. In the meantime, Europe bounced back into the news for largely political reasons. On Thursday ECB President Mario Draghi kept interest rates on hold at 0.75% for the seventh straight month which led to grumbling that the ECB is the only central bank that isn’t loosening its policy. Many believe the run up in the value of the euro stems from a lack of loosening at the ECB. A strong euro, critics say, will hamper an expected but fragile regional recovery this year. The ECB announcement came in the wake of rising Italian and Spanish bond yields which stirred on talk of corruption in Spain and a possible electoral comeback by discredited former Italian PM Berlusconi.
With earnings season coming to a close south of the border it’s worth noting the positive impact corporate America has had on the markets of late. As at the close of trade Wednesday, 74% of S&P 500 companies beat expectations with many being of the large, blue-chip variety. Looking ahead, many Asian markets – China, Taiwan and Hong Kong – will be closed for all or part of next week due to the Lunar New Year, the region’s biggest shopping season.
North American markets edge back
For the four-day period covered in this report, the TSX fell 13 pts. to end at 12,755, the Dow gave back 65 pts. to finish at 13,944, the S&P 500 fell 3 pts. to settle at 1,509 and the Nasdaq shed 13 pts. to close at 3,165.
Investors should be reducing bond exposure and shifting toward equities on any stock market weakness
- Equities - Himalaya Jain, Director, PAG, wrote: “US-listed equity mutual funds and ETFs recorded $77.4 billion of inflows in January, $23.7 billion higher than the previous record of $53.7 billion in February 2000, according to TRIMTABS. The “Great Migration” into equity from bonds appears to have started. While the pace may not be as strong as January, we believe 2013 should witness additional rotation, thereby pushing equity P/E multiples and long-term government bond yields higher.”
- Fixed income - Andrew Mystic, Associate Director, PAG, wrote “With medium- and long-term bond yields biased higher, we think it makes sense to evaluate fixed income exposure as to weighting and duration, with the next logical strategic asset mix shift being a reduction of fixed income holdings and shortening of portfolio duration. For higher quality, shorter term credit exposure, GICs continue to offer better returns than comparable quality deposit notes.”
- Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Risk-On leadership is currently supported by strengthening US housing/employment data, recovery signs in China, a lower yen, and positive equity funds flows. Although improving US and China momentum has been in place since Q3/12, a sliding yen and equity inflows mark a complete reversal from last year’s environment, fuelling risk appetite.”
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