U.S. equities taking a breather
Aug 21, 2013 / 5:00 am
Good economic news raises tapering fears
It was a choppy week for global equity markets with many led lower by fears of a pullback in US central bank stimulus.
As has been the case of late, it was good economic news that sparked fears of a pullback as a number of economic gauges signaled better times ahead. In the US, claims for jobless benefits declined by 15,000 to 320,000 last week, the lowest level in almost six years. The number of people continuing to receive jobless benefits also dropped by 54,000 to 2.97 million while the Empire State Manufacturing survey showed rapidly improving labour conditions. A noticeably improved employment situation is one of the Fed’s preconditions to reduce stimulus, which is why many traders hit the sell button. Bond prices also took it on the chin this week as ten-year government bond yields in Germany, the US and UK spiked with the latter two hitting 24-month highs. Meantime, news that the 17-member eurozone had returned to growth after six successive quarters of contraction was well received earlier in the week. The European stats agency reported that combined GDP was .3% higher in Q2 versus Q1. Leading the continent back to growth was Germany followed by France and a surprise showing by Portugal whose economy produced a 1.1% quarter-over-quarter rise.
Fed uncertainty sideswipes US benchmarks
After a strong start to the month, US benchmarks are on course for their second weekly decline. For the four-day period, the Dow fell 313 pts. to end at 15,112, the S&P 500 lost 30 pts. to finish at 1,661and the Nasdaq shed 54 pts. to close out Thursday at 3,606. In contrast, the TSX rose over the four-day period with the index jumping 162 pts. to end at 12,704.
U.S. equities taking a breather but remain our favourite asset class
- Equities - Caroline Escott, Director, Portfolio Advisory Group wrote: “Canadian equities have marginally outperformed their US counterparts so far this month thanks to a rebound in certain commodity prices. While we remain favourable on equities, particularly the US, we recommend investors maintain higher cash balances in the near‐term to take advantage of anticipated volatility in coming weeks. Specifically, we expect that Fed tapering, German elections, and the US fiscal debate could be sources of material volatility. We remain cautious on interest rate sensitive sectors, constructive on cyclicals, and neutral on Banks, Materials, and Consumer Staples.”
- Fixed Income - Logan Whyte, Associate, Portfolio Advisory Group wrote: “Better than expected US retail sales and jobless claims had bond markets trading softer over the course of the week, while relatively strong housing numbers have continued to add to the selling pressure this morning. With the FOMC considering tapering asset purchases going into the end of the year market movements are likely to become increasingly data dependent. Historical trading patterns suggest that August has typically been a strong month for bonds and scheduled Fed Treasury buying through the second half of the month could prove to be supportive of rates in the near term; however the balance of risks will favour higher rates as we approach year‐end. Investors should look to use rallies as opportunities to take profit and position themselves appropriately in anticipation of increased volatility going into the fall.”
- Preferred Shares - Tara Quinn, Director, Portfolio Advisory Group wrote: “A large seller of preferred shares has spooked the market and we have seen prices drop across all types of preferred shares. The most resilient category of preferred shares during the most recent downturn has been the floating rate preferred shares. The securities that have been affected the most are those which are considered non-investment grade (Pfd-3H and lower), non-bank perpetual securities which lack a maturity date, and rate resets which have a low reset spread (less than 200 bp). Although it is expected that underlying yields could move higher putting further pressure on preferred shares, this asset class can still be a part of a diversified portfolio to provide investors with tax-efficient dividend income.”
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