The Big Picture
Valuation fears grip markets
Growing concerns about the level of stock market valuations sparked a risk-off trade in global markets this week. Investors are worried that many companies’ high share prices aren’t justified in the face of increasingly muted expectations outlooks for earnings. Disappointing economic news out of China Thursday didn’t help as the latest export figures point to further slowing in the world’s number two economy. Exports declined 6.6% last month following a drop in February – the first back-to-back falls since 2009. Chinese trade figures also showed an 11% drop in imports providing another source of concern. News out of the US was, on the other hand, largely positive with jobless claims for last week coming in at the lowest level in seven years and falling more than expected. In Washington, the IMF slightly trimmed its global growth forecast to 3.6% in 2014 and 3.9% in 2015. In the same report, the IMF pegged Canada’s growth to slow to 2.3% this year and 2.4% next; still good enough for third among G7 countries trailing only the UK and US. Finally, after the biggest sovereign debt restructuring in history, Greece returned to the bond markets this week looking to raise three billion euros. That turned out to be an easy task as the five year issue with a yield of just under 5% was oversubscribed.
Stocks turn lower
North American stock markets turned lower late in the week. The NASDAQ and its heavy complement of tech and biotech stocks led the way downward for the four-day period falling 73 pts. to finish at 4,054. The Dow was off 242 pts. to finish at 16,170, the S&P 500 shed 32 pts. to settle at 1,833 and the TSX gave back 85 pts. to end at 14,308.
Valuation remains a barrier to significant share price appreciation
Equities - Warren Hastings, Associate Director, Portfolio Advisory Group wrote “Despite declines in both the TSX and S&P500 indices over the past week, we continue to see valuation as a barrier to significant equity gains in the near term. We continue to expect positive returns for North American equity markets in 2014, and maintain our cautious stance on interest rate sensitive sectors. In the news, the railways made headlines this week as CN’s CEO spoke out against the Canadian government’s imposition of minimum grain shipment targets in March while we also saw a pickup in M&A activity in the Canadian energy sector.
Fixed Income - Andy Mystic, Director, Portfolio Advisory Group wrote “Very little has changed, in our overall view, on the back of this morning’s non-farm payrolls data. Although the US economy will likely continue to show momentum as we enter H214, this morning’s employment data did little to support a breach of the US ten year’s key technical resistance level. As a result, we see ten year Treasury yields remaining range bound in the near term. There does remain the risk that steady growth and momentum does lead to an uneven normalization of yields in the back half of the year. We continue to view name selection as a key aspect of outperformance as the economic backdrop improves and issuers are inclined to take on greater risk. We continue to believe that corporate and provincial paper should outperform straight government paper in the near term. The Canadian yield curve is likely to remain well bid as inflation worries remain muted and the BoC continues to retain a dovish bias. As a result, value inside the three year part of the Canadian curve remains centered on GICs. Canadian credit has seen a bit of shift toward exposures in the five to seven year part of the curve. We see the value of some modest term extension but, given the upward bias and influence of the US term structure, we remain cautious.”
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