Big Picture

Short-lived Greek honeymoon, Fed keeps powder dry, growth fears rise

The warm afterglow from Greece’s pro-bailout vote last weekend was quickly extinguished after the US Fed failed to announce new stimulus measures and economic data from Europe, China and the US noticeably weakened.

The prospect of a potential policy announcement coming out of the two-day FOMC meeting had carried markets higher through Wednesday. But traders hit the sell button as it became clear the Fed would keep its powder dry and simply extend its current bond buying program. The selling intensified Thursday as manufacturing data pointed to deteriorating business conditions in the US mid-Atlantic region. The disappointing read comes on the heels of similarly weak manufacturing data out of New York State. Euro-zone and German purchasing managers' indexes also released Thursday contracted, as did preliminary PMI figures for China, which fell in May for the eighth month in a row.

Meantime, stress tests conducted on Spanish banks showed they need about US$78 billion in new capital to cover shortfalls stemming from soured real estate loans. The beleaguered sector, which politicians are hoping to ring fence, is seen as a possible transmission portal for further euro bank contagion.

Taken together, the week provided further proof of slowing global growth prospects which, in turn, took oil below US$80 a barrel for the first time in eight months. The price of gold also fell after the Fed announcement losing more than US$50 an ounce on the week to close at $1,575.

Markets

Softening economic data sideswipes stocks

After three positive sessions, the S&P/TSX gave it all back and more by Thursday’s close, as commodities dragged the index sharply lower. For the four-day period, the benchmark index lost 117 pts. to close at 11,408.

US markets also took it on the chin with the Dow notching its second-worst day of the year Thursday. For the four-day period, the blue-chip index lost 195 pts. to close at 12,571 Thursday, the S&P 500 fell 17 pts. to end at 1,325 and the Nasdaq shed 13 pts. to settle at 2,859.

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: “From a strategy perspective, we tend to turn bullish on cyclicals/equities when PMI/ISM manufacturing indices bottom. We are not there yet.”

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