Big Picture

Europe to expand rescue fund; U.S. growth beats estimate

Germany approved the expansion of a European bailout fund on Thursday, joining France, Finland, Italy and Spain in agreeing to give the fund more power to resolve the debt crisis in Greece and beyond. There was a new wave of strikes and protests as international auditors arrived in Greece to scrutinize new austerity measures needed to meet the terms of the July bailout. France presented its 2012 budget Wednesday, the first to cut spending since the Second World War. The U.S. economy grew at a 1.3% pace in the second quarter, faster than previously estimated, and much improved from the anemic 0.4% pace in the first quarter.

As new applications for jobless benefits fell to a five-month low in the U.S., Fed Chairman Ben Bernanke urged Congress to act on long-term unemployment, calling it a “national crisis,” with about 45% of the unemployed out of work for at least six months. Prime Minister Stephen Harper, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney met in Ottawa to consider a less aggressive deficit-cutting program, given slowing economies in Canada, the U.S. and around the world. The government had pledged to balance the budget by 2014-15. Home prices in Canada rose for the eighth consecutive month to a new record high, up 1.3% in July from June.

Markets

U.S. data, euro hopes lift stocks

The S&P 500 climbed for a fourth time in five days Thursday after the outlook for the U.S. economy brightened a little and German lawmakers backed a beefed-up European rescue fund. Oil prices will stay above $100 a barrel next year, despite fears of a global recession and steep fall in demand, according to a Reuters poll of 32 analysts. China unveiled its first gold vending machine, which allows shoppers to insert cash or use a bank card and withdraw gold bars or coins.

Shares in Research In Motion spiked Tuesday on speculation that U.S. billionaire Carl Icahn is buying a stake in the company. Icahn has a reputation for being an active investor, using his influence and votes to effect change in underperforming companies. Shares of RIM are down 60% this year. Samsung became the second cellphone manufacturer to agree to pay Microsoft royalties for the use of Google’s Android operating system, which Microsoft claims infringes on its intellectual property rights. Amazon launched the new Kindle Fire at just US$199 – less than half the price of an iPad. The 7" WiFi tablet with Android operating system gives users access to a large, growing number of movies, magazines and music.

Our Recommendation

Short-term cautious but investment bias still favours equities

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Equity valuations appear attractive and current events will ultimately lead to an excellent buying opportunity, but in the near term macro issues will continue to be the primary determinant of equity market direction.”

• Fixed income. Anthony Mentor, Associate, 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. Scotia Capital Portfolio Strategist Vincent Delisle says: “Investor sentiment has collapsed in recent weeks, but our view is that perceptions are currently overshooting the actual damage to the economy and earnings.”

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