Euro-zone political worries, Fed raises US outlook, bank watchdog to oversee CMHC
Major global equity markets stumbled out of the gate Monday but picked themselves up over the following days with many ending in positive territory by the close of trade Thursday.
Euro-zone political turmoil triggered the sell-off the first trading day of the week as French and Dutch politicians came under increasing pressure to reverse or dilute tough austerity measures. The UK’s fall into a double-dip recession is also proving divisive for Britain’s coalition government led by PM David Cameron, an austerity champion.
In the US, markets beat back euro-zone fears and negative readings on durable goods orders and unemployment benefits applications to recoup Monday’s losses and then some. Chairman Ben Bernanke’s quarterly economic update yielded no surprises as the Fed slightly raised its outlook for the US economy while lowering expectations for further quantitative easing.
In Canada, the CMHC got a new boss due to concerns over the booming housing market. The mortgage insurer now reports to the Office of the Superintendent of Financial Services, the banking regulator. The move is designed to increase oversight of CMHC’s $600 billion mortgage portfolio which has almost doubled since 2007. Meantime, the country’s largest province had its credit rating slashed by Moody’s a day after Standard & Poor’s threatened to do the same. The downgrade hikes Ontario’s borrowing costs and reduces the attractiveness of the province’s bonds.
US advances, TSX lags
After a 158 pt. fall Monday, the S&P/TSX scratched its way back to end the four-day period at 12,145 – two points lower than where it started the week. Oil, gold and copper all ended higher over the four sessions with the price of crude rising to over US$104 a barrel, gold settled at US$1658 an ounce while copper closed at 3.78 a pound.
South of the border, the Dow, S&P and NASDAQ also endured a tough start to the week but were able to rebound and close Thursday solidly up. The Dow, which opened at 13,029, settled at 13,204, the S&P 500 added 21 pts. to close at 1399 and the Nasdaq proved to be the strongest performer rising to 3,050 from 2,969.
Further U.S. equity market weakness expected, but presents opportunity
Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “We believe there is further downside risk in U.S. equities in the short term, but ultimately view any pullback as being healthy for the longer-term outlook for equities. ”
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. Scotia Capital Portfolio Strategist Vincent Delisle says: “We believe a reversal could develop in the second half of the year, but "risk-off" sentiment could prevail well into Q3. We believe commodity leadership should come back when Chinese slowdown fears fully abate and world GDP growth accelerates back towards 4%.”
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