Euro-zone flare-up chills markets

Big Picture

Euro-zone flare-up chills markets

Worries over a failing Cyprus and its impact on the euro-zone economy pulled most major equity markets lower this week.

And it appears the uncertainty will continue today (March 22) and perhaps through the weekend as the country has until Monday to reach a bail out deal or the ECB will cut off emergency funding to its banks. That would mean the end of the Cypriot banking sector as we know it and could trigger the country’s exit from the euro zone. A plan to restructure its banks and avoid that fate is being debated in Parliament today. But even if Cypriot lawmakers pass the bill it isn’t clear the country’s creditors will approve it. While fresh turmoil erupted overseas it was more of the same in the US where economic data was mostly positive since the start of the week. Sales of previously owned properties grew to the highest point in three years while the building of single-family homes rose to a nearly 5-year record high. Additionally, the number of new building permits rose 4.6% which topped forecasts and in the past year 1.7 million households regained equity in their homes. That means they owe less on their mortgages than they do their homes. The good housing data was bolstered by comments from Fed Chairman Bernanke on Wednesday who promised to keep easy money policies in place. Also positively, the US Senate approved a budget bill Thursday that keeps the government operating through September avoiding potential budget brinkmanship at least until fall. Finally, in Canada, the conservative government released its 2013 budget which promises to eliminate the $26 billion deficit by 2015.

Markets

North American stocks fall

For the four-day period covered in this report, the TSX fell 83 pts. to end Thursday at 12,747, the Dow fell 93 pts. to finish at 14,421 and the S&P 500 shed 15 pts. to close at 1,545.

Scotia’s Recommendation

No change to our pro-U.S. equity stance post Cyprus deposit levy debacle

• Equities - Himalaya Jain, Director, PAG, wrote “Headlines from Europe have once again raised investor anxiety. However, unlike instances in 2011 and 2012, when European issues were able to strike fear into equity investors, the ongoing recovery of the U.S. economy (i.e. housing and employment) should prevent material disruption to the upward trend of U.S. equities. We are maintaining our positive view on U.S. equities and expect that a correction, if any, will likely be limited to 2%-4%. As such, we recommend buying on weakness.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: “Investors should continue to maintain a market weight exposure to high yield. Despite recent events in Cyprus, we continue to believe that rates will likely retain their upward trajectory, particularly in the back half of 2013 and the beginning of 2014. Having said that, recent events will likely keep the US 10-year treasury yield in the 1.80-2.10% range for the near-term.”
• Preferred - Tara Quinn, Director, PAG, wrote: “We have seen several banks redeem their existing high dividend perpetual preferred share so far in 2013. It is expected that this trend will continue going forward.”

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