Big Picture

Euro-zone worries deepen, Greek vote set for Sunday, stimulus hopes rise

Global equity markets see-sawed this week as traders digested a wide range of developments across the euro zone and looked ahead to Sunday’s Greek election, which could pave the way for that country’s exit from the common currency.

With Greece on hold, eyes turned to Spain. It could be next in line for a bailout as its government wrestles with increasingly higher yields at debt auctions. Spanish banks received a cash infusion of US$125 billion last weekend to maintain their solvency. But relief for the banks quickly turned into worry as borrowing costs for its government jumped higher, touching the 7% mark for 10-year issues. For Spain and increasingly Italy, 7% yields endanger hopes the countries will be able to overcome their problems without full bailouts, because refinancing becomes unsustainably expensive. In other developments, Cyprus said it urgently needed European financial aid to boost its banks’ capital, a step that would make it the fifth euro-zone economy to require a bailout. In Cyprus’s case, the dollar amounts are small but the significance is big, as it sends a further signal that contagion is spreading.

Meantime, US economic data continues to disappoint. Retail sales fell 0.2% in May making this the second straight month sales figures have dropped. There was also an unexpected rise in the number of people filing jobless claims reported Thursday. The negative US numbers and the deteriorating euro situation have led to increased speculation regarding coordinated central bank intervention in both Europe and the US.

Markets

TSX loses ground, gold gains for fifth day, US stocks rise on Fed stimulus hopes

The S&P/TSX closed Thursday at 11,466; 34 pts. lower than its Monday open. Gold has been on a five-session win streak adding nearly US$50 an ounce since last Friday to close at $1,625 Thursday. Oil ended almost flat to Thursday close at US$84.24 a barrel after falling as low as $81.88 Tuesday; the lowest since Oct. 2011.

In the US, the prospect of further Fed stimulus measures offset euro concerns enabling most major indexes to finish in positive territory. The Dow advanced from 12,554 to 12,651, the S&P 500 rose from 1,325 to 1,329 and the NASDAQ fell from 2,858 to 2,836.

Our Recommendation

European woes overshadow compelling equity valuations

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “recognizing there is still downside risk to equities, there are many stocks we find attractive at current valuations and recommend accumulating positions.”
• 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: “once systemic risk settles and interest rates normalize higher, a look back at today's relative valuation levels will look compelling.”

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