TSX, US markets pull back

Big Picture

Greek turning point; further cooling in China; Fed closer to action

Expectations for further economic stimulus weren’t enough to sustain the summer rally in global equity markets through Thursday after further economic and political question marks appeared on the horizon.

In Europe, the headline event was Germany’s lack of commitment to give Greece a reprieve from tough austerity measures. Greece has fallen behind its fiscal commitments and is in Berlin to try to get more time to implement painful budget cuts. Germans are reluctant to cede to the Greek request and have previously taken a hard line saying no more bailout money will be provided if the country veers from its budgetary promises. The alternative, however, may be a Greek exit from the euro zone which would potentially be far more costly than a Greek reprieve. Meanwhile, a preliminary gauge of manufacturing activity in China fell to a nine-month low Thursday providing further evidence of cooling in the world’s second largest economy.

In the US, a housing report released Wednesday showed a 10% rise in existing home sales from a year ago but the number still fell short of expectations. Additionally, the number of people filing for jobless benefits claims rose for the second straight week. The disappointing reports add to a string of uneven economic data over the past several months which have led “many” members of the Fed to support the idea of additional stimulus measures. The acknowledgement among Fed members was contained in minutes released from the central bank’s last meeting at the end of July. Hopes for more stimulus have buoyed markets of late and the next hint of action may come when the group gets together in Jackson Hole, Wyoming August 31. Failing that, the Fed’s next policy meeting is Sept. 12-13.

Markets

TSX, US markets pull back

Over the four-day period, the TSX slipped 27 pts. to close Thursday at 12,062. Of note were gold prices which advanced to their highest level in 16 weeks while oil rose to a three-month high before backing off.

After toying with multi-year highs, the Dow and Nasdaq pulled back this week, as did the S&P 500 which did successfully hit a four-year intraday high. For the four-day period, the Dow slipped 217 pts. to end at 13,057, the S&P 500 fell 16 pts. to close at 1,402 and the Nasdaq exited 23 pts. lower to finish at 3,053.

Our Recommendation

Equity rally over-extended, add to cyclicals on weakness

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Equity markets appear to be overbought in the short term but may continue to “melt up” in the absence of significant news flow; important U.S. macro data will be released in the first few days of September.”
• Fixed income. Andrew Mystic, Associate Director, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
• Portfolio strategy. Scotiabank GBM Portfolio Strategist Vincent Delisle says: “worsening Chinese data should prompt authorities to accelerate easing measures, which could help Chinese growth recover later in Q4. Overall, chief among the factors driving the summer pick-up in sentiment is the belief that policy easing will intensify notably in Europe and China.”

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