Big Picture

EU meeting sparks global rally, central bankers adding more stimulus

Global equity markets surged this week in response to positive developments coming out of the two-day EU meeting that concluded last Friday. The developments – the agreement to create a single euro bank supervisor and the direct injection of bailout monies into banks – were perhaps the most concrete steps taken to date to deal with the crisis.

One of the keys to solving troubles in Europe lies in closer integration of the region’s banks and greater fiscal unity among the 17-member currency union. Any steps taken – such as last week’s to install a single regulator to replace the current patchwork of 17 – to bring that closer to happening removes one source of stress on the bloc’s financial system.

The news, which came on the last trading day of the quarter, ignited markets around the world and pared losses in what was a disappointing quarter for equity markets. Commodities were some of the prime beneficiaries as oil jumped nearly 10% and gold moved over US$50 an ounce on the day. The winning streak continued during the holiday shortened trading week in the US and Canada, as traders looked to central bank announcements Thursday for new measures to stimulate economic growth. They got what they were looking for as the ECB cut interest rates, as did the People’s Bank of China, while the Bank of England boosted the amount of money in circulation. Market response was, however, muted and Spanish bond yields were once again on the rise; a sharp reminder that significant challenges remain.

Markets

TSX outgains US markets

A six-day win streak for the TSX came to an end at close of trade Thursday with the benchmark index rising 393 pts. since the release of last week’s Market Watch. The TSX, which now stands at 11,817, has started to close the performance gap with US markets on the back of rising commodity prices.

US markets also enjoyed a multi-day advance with the Dow adding 294 pts. since the release of last week’s Market Watch, while the S&P 500 rose 38 pts. The Dow now stands at 12,896 while the S&P 500 is at 1,367.

Our Recommendation

Global central bank intervention will be supportive for equities

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “many stocks are trading at attractive valuations for longer-term investors, particularly in the Energy and Materials sectors and U.S. Industrials; however, we expect market volatility to continue through the balance of the year.”

• 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: “synchronized easing marks a positive development for equities heading in the final stretch of the year.”

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.