Big Picture

All eyes on euro summit; Obamacare gets green light

It was a relatively quiet week for global equity markets as traders bided their time ahead of a two-day meeting of European leaders in Brussels. The meeting, which got underway Thursday, is viewed as another chance to bridge policy differences among the 17-member euro zone.

One of the key proposals – creation of euro bonds – has been steadfastly dismissed by Germany which is loathe to put its money and credit rating on the line to support debt sharing for the region. German reluctance may soften if deeper fiscal integration among euro-zone countries precedes the mutualization of debt. Germans are hesitant to put their economic strength at risk unless structures are in place to ensure oversight of other countries’ sovereign budgets. The challenge is that such structural changes could take years to implement, so the only way to satisfy German reluctance may lie in a promise of a “fiscal czar” down the road with broad powers over other countries’ budgets. Other proposals – including a banking union – are also on the table. The most notable development after the first day of talks was news of an agreement to use bailout funds to directly aid banks.

Closer to home, the US Supreme Court ruled favourably on Obamacare providing clarity to the healthcare sector and paving the way for an additional 30 million Americans to receive medical benefits. Separately, US economic data remained mixed with housing and durable goods numbers showing improvement but consumer spending falling.

Markets

US markets remain positive ytd, TSX lagging

For the four-day period, the TSX fell 11pts. to end at 11,424, the Dow was off 38 pts. to close Thursday at 12,602, the S&P 500 fell 6 pts. to 1,329 and the Nasdaq was off 43 pts. to settle at 2,849.

With one trading day left in the second quarter, most North American markets remain positive with the exception of the TSX. It remains in the red through the first half of 2012 off 4.44% ytd. The Dow, S&P 500 and Nasdaq are in positive territory with the indexes up 3.15%, 5.68% and 9.38%, respectively ytd.

Our Recommendation

Euro summit surprise provides market optimism, for now

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “stock prices appear oversold, having already priced in a lot of pessimism and are looking for a reason to rebound.”
• 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 the opportunity to raise cyclical exposure could present itself in Q3 when PMI/ISM indices bottom and negative earnings revisions stabilize.”

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