Manufacturing activity in China and the eurozone slowed to its weakest pace in more than two years. China’s purchasing managers’ index plunged to 48 in November from 51 a month ago (below the 50 level indicates a contraction in activity). In Europe, activity fell for the third straight month with the index slipping to 46.4, its lowest since July 2009. A disappointing bond auction in Germany raised the alarm that the debt crisis is starting to affect even the region’s powerhouse. Europe’s most credit-worthy nation found no buyers for almost half of the €6-billion of bonds on offer.

Portugal had its credit rating downgraded to junk status as public outrage over austerity measures erupted in a major strike. Standard & Poor’s raised the outlook on Iceland’s credit rating to stable from negative as the island’s economy returns to growth following the 2008 default by its three biggest banks. U.S. GDP growth in the third quarter was revised down to a 2% pace, from 2.5%. Data suggests the fourth-quarter growth rate could exceed 3%, which would be the fastest in 18 months. A U.S. congressional committee tasked with reducing the deficit by US$1.2-trillion over 10 years, failed to reach an agreement.

Markets

Slowdown and eurozone fears weigh on stocks

Wall Street shares fell more than 2% on Wednesday, ahead of U.S. Thanksgiving, and world stocks fell to a six-week low, as global manufacturing slowed and a disappointing German bond auction fueled fears over Europe’s fiscal crisis. Canada’s stock market was hit hard, as a global slowdown would dampen demand for industrial commodities. The U.S. dollar hit a six-week high versus a basket of currencies as investors sought a safe haven. H-P announced a sharp drop in quarterly profit after writing off losses related to shutting down its mobile-software business. The company is rebuilding under a new CEO.

Groupon, which launched an IPO three weeks ago, shed one-third of its market value in the past week, wiping out nearly US$6-billion in shareholder wealth. John Deere quarterly profits jumped 46% versus a year earlier. The company expects equipment sales to increase by 15% next year as high grain prices and record U.S. farm incomes spur demand. In the third quarter, China overtook the U.S. to become the world’s largest smartphone market by volume. Amazon is taking a loss on each US$199 Kindle Fire it sells, according to a research firm that pegs the cost at US$201.70. The loss sounds small until you consider the Fire is projected to sell between 3- and 5-million units this year. Amazon stock fell on the news.

Our Recommendation

Fundamentals taking a back seat to macro concerns

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “If investors were able to consider in isolation recent U.S. economic statistics, corporate earnings, improving profit margins and strong balance sheets, all collectively known as “fundamental data”, current stock prices would be seen as exceedingly attractive; regrettably, in the current environment, fundamentals continue to be superseded by macro concerns.”

• 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 Hugo Ste-Marie says: “Our main fear right now is that a U.S. recession scenario becomes a self-fulfilling prophecy, especially as European credit fears linger.”

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. All performance data represents past performance and is not indicative of future performance.