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It-s-Your-Life

Geopolitical tensions rattle markets

The Big Picture

Geopolitical tensions rattle markets

The spectre of rising geopolitical tensions in Ukraine and Gaza cast a shadow over an otherwise positive week in the markets. News that a passenger jet was tragically shot down in Eastern Ukraine Thursday may prove to be a turning point in the conflict that’s already ensnared Russia, Ukraine, the US and its allies. Equally concerning is the ground offensive Israel launched into Gaza on the same day to neutralize Hamas militants after ten days of bombardment. In both instances, the fear lies in an escalation of the conflicts and the prospect of them broadening beyond the region. Until Thursday, the markets had put in a good showing thanks to encouraging US corporate earnings, good news from China and supportive words from the Fed. In her semi-annual report to Congress, Fed chief Janet Yellen reiterated her belief that “a high degree of monetary policy accommodation remains appropriate”. Turning to US corporate earnings, more than 50 companies in the S&P 500 reported through Thursday with many surpassing the expected 4.8% rise in profits. Solid earnings helped divert attention from disappointing US retail sales and an underwhelming housing report which showed new home construction falling well short of expectations. In Canada, the BoC released its regularly scheduled interest rate policy statement and there was, as expected, no change in interest rates – still 1% since 2010. But there was a change in outlook with growth expectations reduced for this year and next. Farther afield there was good news out of China which reported a slight acceleration in Q2 growth as GDP grew to 7.5% compared to 7.4% in Q1. The increase is credited to recent stimulus efforts and points to a potential bottoming in Chinese growth. Finally, the BRICS nations – Brazil, Russia, India, China and South Africa – announced the creation of a development bank to assist in infrastructure work and emergency financing similar to the IMF.

 

Markets

Stocks lose momentum

Stocks lost momentum over the four-day period and ended mixed. The Dow rose 33 pts. to finish at 16,976, the S&P 500 fell 9 pts. to close at 1,958 and the Nasdaq shed 52 pts. to settle at 4,363. The TSX gained 79 pts. to end at 15,204.

 

Our Recommendations

Banks and lifecos most hospitable space within traditional yield sectors, bonds have an eventful week

Equities

Himalaya Jain, Director, Portfolio Advisory Group wrote “As Canadian bank stock hit new highs, we are being asked more frequently whether they are overvalued. While valuation multiples have increased, we don’t consider forward P/E multiples to be excessive at this point. Sentiment on the bank sector has improved to reflect expectations of a soft landing in the Canadian housing market and consistent earnings growth. Funds flow from other traditional dividend-growth sectors may also be fueling the rise in the banks. Street sentiment on the telco sector has been souring due to fear of increased competition, pipeline/utilities trade at valuations well above historical averages, and the REIT sector remains vulnerable to higher interest rates. This leaves the banks and lifecos as the most hospitable space within the traditional yield sectors. While banks may yet have further upside, lifecos look relatively more attractive based on valuation. In addition to higher bond yields, another potential catalyst over the next 12 months for the lifecos is a resumption of dividend growth.”

Fixed Income

Andy Mystic, Director, Portfolio Advisory Group wrote “Despite being relatively lackluster early on, it did prove to be an event filled week with comments from Fed Chair Yellen, the Bank of Canada rate decision and a heightening of geo-political risks to close out the week. During her semi-annual testimony to Congress Fed Chair Yellen continued to signal an expectation for low interest rates, noting that the US economic recovery is not yet complete with still too many Americans unemployed. Sticking to her recent tone she further noted that “a high degree of monetary policy accommodation remains appropriate.” The Bank of Canada this week pushed out its economic capacity expectations suggesting that the Canadian economy would not reach fully capacity until the mid-part of 2016 - three months later than previously forecast. The Bank retained a neutral interest rate bias but with Canadian CPI having printed Friday at 2.4% y/y (vs. exp. 2.3% y/y) – inflationary concerns will likely be coming increasingly into focus. Although we traded in relatively subdued fashion through most of the week, the shooting down of a Malaysian Airlines Boeing 777 over eastern Ukraine saw bonds rally firmly Thursday – with the event seemingly signaling a further deterioration in Western-Russian relations. . Despite the geo-political risks, our broader views on the US and Canadian economies remain largely intact. Despite the rally seen in bonds, investors still aren’t being sufficiently compensated for extending term, in our view. With inflation and most US data gathering momentum, we continue to highlight the risks of a Fed that that could turn hawkish, supporting the need to remain defensive. In the short term though, geo-political risks could hold rates in at lower than expected levels.”

 

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.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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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.



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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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