ECB plan sparks market surge, positive US economic data sets table
Just as all eyes were focused on US Fed Chairman Bernanke last Friday, it was ECB President Mario Draghi in the spotlight this week. Unlike Bernanke, Draghi delivered by announcing the outlines of a bond-buying program to purchase short-term debt in unlimited amounts to help troubled euro-zone countries.
Spain and Italy are at the front of the line to benefit from the plan as both countries continue to wrestle with run-away borrowing costs to finance their debts. Neither Spain nor Italy have formally asked for assistance – a precondition of the bond-buying program – as the countries will have to accept detailed conditions for paying down their debt and embrace fiscal discipline. Markets cheered the news with many global indexes posting their biggest one-day gains in a month.
The table had been set for a big day by positive employment data out of the US. The number of people applying for unemployment benefits last week fell by 12,000 compared to the previous week while private companies added 201,000 jobs in August. Both figures exceeded expectations, as did the results of an ISM report that showed service-sector activity increased in August versus July. The ISM measure had been expected to fall.
Investors now shift their attention to the US monthly jobs report due today (Friday). That, in turn, could influence the decisions made at next week’s meeting of the Federal Reserve’s Open Market Committee, which has been contemplating providing more monetary stimulus for the economy.
TSX and Dow surge, S&P 500 hits 4-year high, Nasdaq reaches 12-year high
The holiday-shortened week turned out to be a good one for the TSX which added 190 pts. to close Thursday at 12,139. The index was led higher by primarily gold and energy stocks, which both got a lift from rising commodity prices.
US markets made headlines with the benchmark S&P 500 surpassing a high last seen in January 2008 and the Nasdaq besting its highest close since 2000. At Thursday close the S&P 500 was at 1,432 pts., the Nasdaq 3,135 and the Dow, 13,292.
Equity rally over-extended, add to cyclicals on weakness
- Equities. Shane Jones, Chief Investment Officer, ScotiaMcLeod wrote: “the recent announcement from the ECB has certainly shifted investor sentiment from pessimistic to optimistic. Although the news is very positive from equity markets we still believe there are potential hurdles out there globally, especially a lack of growth in Europe and China. We recommend cautiously adding equities while reducing fixed income in portfolios”.
- 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.”
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