US stocks pull back from records

The Big Picture

Weak euro-zone growth, mixed US economic readings cloud outlook

Word of slowing growth in Europe sideswiped markets this week while continued mixed signals south of the border re-ignited global growth worries. In Europe, Q1 GDP growth for the euro zone came in at 0.2% missing expectations for a 0.4% rise. At the country level, Germany’s GDP grew the fastest at 0.8% while France’s was flat and Italy’s declined 0.5%. Overall, the numbers point to an economic region that’s stuck in first gear; enough to prompt policy makers to call for lower euro zone interest rates to prevent the region from falling into economic stagnation. Last week, as market watchers may remember, ECB Chief Draghi indicated his predisposition for monetary easing. Also in Europe, traders continue to keep a wary eye on the situation in Ukraine. Thursday brought more disagreement and harsh words between Russia and Ukraine over the price of energy while pro-Russian separatists in the Eastern part of the country maintain their positions after declaring victory in Sunday’s secession referendum. Russia said it would respect the vote and hopes for a civilized implementation of the results. The West and Ukraine view the referendum as illegitimate. Turning to the US, economic readings continue to confound with April retail sales barely rising – and missing – while import prices for April declined versus expectations for a slight increase. Most heartening was news of an uptick in inflation as measured by the producer price index Wednesday. The index measures the prices companies receive for their goods and services and it rose an annualized 0.6% in April from a month earlier. That was the biggest jump since September 2012 and it soundly beat consensus forecasts of 0.2%. The rate of inflation is closely watched at the Fed which views slightly rising prices as a sign of economic strength versus falling prices which suggest weakness and instability.

 

Markets

US stocks pull back from records, TSX gains

After notching fresh record highs at the close Tuesday, the Dow and S&P 500 promptly fell back ending Thursday’s session lower than where they started Monday. For the four days covered in this report, the Dow fell 137 pts. to end at 16,446, the S&P 500 shed 8 pts. to finish at 1,870 and the Nasdaq gave back 2 pts. to settle at 4,069. The TSX continues to buck the trend gaining 54 pts. to end Thursday at 14,588.

 

Our Recommendations

Ahead of Canadian Banks Earning Season

Equities

Himalaya Jain, Director, Portfolio Advisory Group wrote “In a short-term tactical move, we have been trimming holdings of some of our Canadian banks from their large overweight positions. The drop in bond yields and the potential negative implications for net interest margin in Q2 and potentially Q3 bank earnings, combined with lacklustre capital markets activity, are particularly concerning in the near-term, and set the stage for a potentially disappointing bank earnings season starting next week. Furthermore, we continue to remain cautious in the near-term on equity markets due to geopolitical concerns, valuation, and seasonality. We intend to revisit our bank holdings after Q2 results with an eye to rebuild positions on any meaningful pullback.”

Fixed Income

Andy Mystic, Director, Portfolio Advisory Group wrote “Comparable to the equity landscape, seemingly toppy valuations along with seasonal weakness and anxieties over Ukraine have left yields trending down towards the bottom of their recent ranges. Although credit still likely has room to tighten relative to long-term historical levels, the combination of low yields and tightening credit spreads are increasingly leaving fixed income investors uninspired. Although we continue to believe that yields should normalize, particularly in the back half of this year, global risks and growth concerns (i.e. China, Ukraine/Russia, and Europe) could dampen expectations. Adding to this bias in the near-term will be fixed income coupon and principal payments in June which could add downward pressure to yields as investors look to put maturing cash and coupon payments to work. Overall, we believe that fixed income investors should remain defensive but acknowledge that in the near-term, yields could remain better contained than the consensus forecasts suggest.”

 

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