Canadian mortgage risk

Big Picture

China cools, Euro-zone recedes, Canadian mortgage risk

Major global equity markets took a breather this week from their recent advance as worries over weakening economic data out of China fed fears of slower global growth.

Australian mining giant BHP Billiton (BBL) warned that Chinese demand for its iron ore is expected to slow as the world’s second largest economy cools. The news comes on the heels of lowered expectations of Chinese GDP growth for 2012, which is forecast to be 7.5%, an eight-year low. Most recently, a purchasing manager’s survey released Thursday showed factory activity contracted in March – the fifth month in a row.

In Europe, the purchasing managers index - a key economic indicator - also released Thursday fell deeper into recession territory while a contraction in French and German manufacturing increased growth worries. Meantime, a German bond auction held earlier in the week saw yields on the benchmark 10-year bonds rise to 2.07% – an 18% jump from last week. As yields rise, prices drop and with euro-zone banks stuffed with bonds there is concern a continued yield rise could ail the already creaky banking sector.

It was a light week for US economic data with existing-homes sales numbers and new homes under construction figures disappointing. A decline in jobless claims was welcome news. In Canada, consumer mortgage risk may lead to new regulations while TransCanada (TRP) gets Obama’s support to build a Cushing-to-Gulf Coast pipeline.

Markets

Dow, S&P 500, TSX fall; NASDAQ bucks trend

The Dow and S&P 500 ended the four-day period lower falling back from multi-year highs on growth concerns. The tech-heavy NASDAQ was up 10 pts with Apple’s (AAPL) decision to buy back shares and pay a dividend getting the week off to a good start. In Canada, the S&P/TSX performed in line with its US peers, falling on the week at close of trade Thursday. Oil and gold stocks did most of the damage with bullion shedding about US$15 an ounce and falling to a two-month low of US$1645. Oil gave back about US$3 to end at $104.96 a barrel.

Our Recommendation

Changing tone from the Fed is significant for financials

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “As much as equities are the preferred asset class relative to bonds and the medium to longer term outlook for stocks remains favourable, in the short term we may be in the final stages of this equity rally and be setting up for a quiet summer as investors await the outcome of U.S. elections in the fall.”

• 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: “From an equity perspective, the good news is that rising bond yields could spark asset rotation out of safe-haven vehicles (bonds, gold) and into equities (financials).”

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