Global markets surge
Jul 18, 2012 / 5:00 am
All eyes on banks, investors pessimistic on central bank efforts
The Libor scandal this week placed global banks under renewed scrutiny, with the number of institutions caught in the widening net of the investigation growing as regulators in the US, Canada, Europe and Asia piece together the extent of the manipulation in the key lending rate. Already, some are pointing to the scandal as being potentially one of the most costly and consequential in the history of banking.
Against this backdrop is the growing unease of investors in the ability of central banks to stimulate growth amid what seems to be a constant barrage of economic setbacks. Rate cuts by both the central banks of Brazil and South Korea added to recent moves by the European Central Bank to cut its overnight rate to 0.75 per cent, and the People’s Bank of China in making its second cut in the past two months to its key rate. Italy passed a tough market test on Friday as its three-year borrowing costs fell below five per cent at an auction hours after a surprise cut by Moody’s to the country’s sovereign debt rating to two notches above junk status—Baa2. China’s growth rate, meanwhile, skidded for a sixth successive quarter to its slowest pace in more than three years. In Canada, the central bank is expected to hold its benchmark rate at 1 per cent next week.
Investors reacted largely negatively to these efforts throughout the week, with markets falling until Thursday. However, by Friday morning, global markets appeared to be showing signs of recovery.
Global markets surge to end the week
Global stocks rallied on Friday, ending the longest slump since November, as JPMorgan Chase & Co. was sharply higher after reporting earnings. Chief Executive Jamie Dimon said the bank still is likely to post record earnings this year even after reporting a $4.4 billion trading loss from its chief investment office in the second quarter.
The S&P 500 rebounded following six days of losses, the longest period of losses in almost two months. The S&P 500 was up over 18 points (1.38%) by mid-day Friday; the Dow was up over 170 points (1.36%), while the S&P/TSX Composite Index was up over 80 points (0.7%). The TSX continued to gain ground against the Dow for the week, closing even further the performance gap with the US on rising commodity markets.
China, Europe, and the U.S. all expected to boost stimulus efforts
Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “longer term investors should be buying selectively, particularly in the Energy and Materials sectors and U.S. Industrials which are largely oversold.”
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: “ in our view, bonds are pricing in a lot bad news, and equity downside risks (weaker GDP, negative earnings revisions, fiscal cliff) are somewhat offset by compelling relative valuations and a global easing.”
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