Big Picture

Bankers offer assurances but no action, US economic data tilts to favourable

An absence of fireworks from both the ECB and Fed was the most notable event of the week as both banks withheld new economic stimulus measures. Markets had rallied ahead of announcements by central bankers Draghi and Bernanke in anticipation they would deliver new initiatives. But the only thing to materialize was more assurances of action.

For Bernanke, he remains in wait-and-see mode and says he may make a move should the job market not make “sustained progress” in bringing down an unemployment rate that’s been stuck above 8% for 41 consecutive months. Although Draghi offered similar assurances to act and stated his willingness to do whatever it takes to prevent the disintegration of the euro currency union he, unlike Bernanke, faces more technical hurdles when it comes to action. Printing money to buy Italian and Spanish debt is seen by many – notably Germany – as a stretch in the ECB’s mandate and the country opposes the use of central bank assets to purchase government debt. The lack of any substantive central bank announcements led markets lower and by mid-day Thursday Italian and Spanish bond yields were on the rise again.

US economic news was, on the whole, modestly better than expected which may have impacted the Fed’s decision making. Home prices rose in May for the second straight month, the Chicago PMI beat as it rose in July; consumer confidence also rose more than expected last month as did personal incomes in June. The number of people filing jobless claims also rose less than expected last week. Look to the release of non-farm payrolls Friday morning to set the tone for the day’s market action.

Markets

Markets lower on banker inaction, July a winner for New York not Toronto

The TSX put in a losing month for July but is down just 2.34% ytd even though it may feel worse than that for some. For the four-day period, the TSX lost 260 pts. to end Thursday at 11,506.

In New York, the Dow, S&P 500 and Nasdaq put together a winning – albeit modest – month of gains and have advanced 6.48%, 9.68% and 12.83% ytd. For the four-day period, the Dow slipped 197 pts. to close at 12,878 pts, the S&P 500 lost 20 pts. to close at 1,362 and the Nasdaq shed 49 pts. to end Thursday at 2,909 pts.

Our Recommendation

Equities still preferred asset class, but expected to remain range-bound

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Although we can still find certain sectors and individual companies which offer compelling value, technical indicators suggest that while we have probably seen the market bottom, a re-test of recent lows would not be a surprise.  Longer-term investors should be buying selectively, particularly in the Energy and Materials sectors in Canada, and U.S. Industrials, Technology, and Financials.”
• 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: “the true benefits of easing arise when economic data stop deteriorating. Looking at current trends in U.S. and Chinese indicators, macroeconomic momentum remains challenging.”

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