Euro debt woes re-emerge

Big Picture

Euro debt woes re-emerge

Europe’s debt woes jumped back into the headlines this week trumping other economic, geopolitical and corporate developments. Word that one of Portugal’s biggest-listed banks had delayed coupon payments on some short-term debt securities spooked global financial markets Thursday. The fall-out was most pronounced across the euro-zone – particularly the banking sector – but ripples travelled as far as North America where fidgety traders hit the sell button. That was in stark contrast to the previous day when sentiment was running high after the US Federal Reserve released minutes from its latest policy meeting. The minutes confirmed the bank’s accommodative stance as there was no mention of an interest rate rise which emboldened traders. What was in the minutes was agreement among officials to end the central bank’s bond buying in October – something that had already been expected and largely factored into the markets. The Q2 US earnings season – not Portuguese bank debt – was expected to dominate the narrative at the start of the week with expectations for a 4.8% rise in corporate profits versus a 2.1% climb in Q1. Finally, a range of geopolitical tensions continue to percolate in the background. In the Mid-East, Israel and Palestinians in Gaza are exchanging missile fire while the Iraq situation remains fluid and unpredictable. Meantime, the Ukraine government remains engaged in a day-to-day conflict to oust pro-Russian separatists from its soil.



Stocks fall from peaks

North American benchmarks came off their record highs with the Dow shedding 153 pts. over the four-day period to end Thursday at 16,915, the S&P 500 slipped 21pts. to end at 1,964 and the Nasdaq gave back 89 pts. to close at 4,396. The TSX dropped 100 pts. to settle at 15,114.


Our Recommendations

Preferreds trending higher as expected, rising risks to long-term bonds

Preferreds - Tara Quinn, Director, Portfolio Advisory Group wrote “The preferred share market continues to trend higher as the supply vs. demand theme we expected at the beginning of the year continues to affect preferred share performance. The recent reset redemptions have helped the performance of existing resets as money is being reinvested into good quality securities. As this time we still view rate reset preferred shares as offering an attractive yield versus corporate bonds. Bank perpetuals are trading with a negative yield to call and should be avoided at this time. We would also encourage investors to consider reducing exposure to non-bank perpetuals as there are risks that 30-year bond yields could drift higher from current levels causing prices to fall.”

Fixed Income - Andy Mystic, Director, Portfolio Advisory Group wrote “With inflation beginning to rise, the US economy continuing to gain traction, and markets seemingly becoming complacent (volatility currently at pre-crisis lows) we see some rising risks to bonds. That being said, the technical buying that would likely materialize with a US 10-year Treasury yield in the 3.0-3.25% range, make it difficult to envision US rates moving materially above that level with any great authority in the near-term. With risks beginning to become more pronounced, but rate and spread levels still relatively low, there remains very little incentive to assume risk. As a result, we continue to believe that investors should remain short duration (i.e. durations typically of three to four years or lower). With credit spreads continuing to approach historical tightness (IG five year currently at 55.2bps vs. low of 29.7bps) security selection will become increasingly important. At the front end, GICs still provide the best relative value (one to five years). Within the investment grade space defensive investors should migrate towards better rated credit (e.g. BBB to A). We would suggest that investors limit or reduce exposure to high yield (HY) product which continues to grind up to historical highs. In addition to the diminishing risk/reward proposition of HY, investors remain vulnerable to extension risk as a sufficient sell off in HY could drive duration term extension. Although the HY carry trade could potentially continue for some time yet, the relative attractiveness of the HY space is clearly diminishing – particularly as markets seemingly become complacent and volatility remains subdued. Investors are simply no longer being paid sufficiently for HY risk, in our view.”


All performance data represents past performance and is not indicative of future performance. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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