Big Picture

Stimulus hopes buoy markets, renewed but fragile optimism takes hold

Renewed expectations of central bank stimulus in the US, Europe and now China pushed markets higher this week despite little change in euro circumstances and continued signs of weakness in the global economy.

On Thursday, China reported the slowest factory output growth in three years last month while retail sales also weakened. The bright spot in Chinese economic data was an easing in consumer price inflation for the fourth month in a row. Lower inflation provides Beijing with greater flexibility to encourage growth through monetary policy. With the addition of China, it appears the three largest central banks in the world may be poised to unleash stimulus measures. That would be good for stocks and it appears to be the driver behind the recent move up in the markets. But that move could prove fragile as traders weigh the realization of an increasingly slower growth China against the prospects of central bankers’ action. Adding to rising expectations of more stimulus were mid-week comments by the Federal Reserve’s Bank of Boston President who believes that central banks should pursue an open-ended easing program of substantial magnitude to maintain the economic recovery. These comments build on the recent declaration by the ECB head to do everything in his power to save the single currency union.

Whether new stimulus comes to pass is another matter but the hope of new measures has been enough to overshadow more dismal data out of Europe this week. The most recent ECB survey showed rising expectations for the euro-zone economy to contract more sharply this year than in previous estimates, as well as a diminished view for growth in 2013. South of the border, the jobs picture brightened – a negative for stimulus – as the number of people applying for unemployment benefits last week fell to a seasonally adjusted 361,000, which suggests hiring is strong enough to lower the jobless rate.

Markets

TSX posts strong three-day advance, US markets at multi-month highs

In Canada, the TSX surged at the start of trade Tuesday after the long weekend with the index posting a one-day 200 pt. advance largely on the back of oil and gold stocks. For the three-day period, the TSX rose 196 pts. to end Thursday at 11,858 but commodities could come under pressure today in light of the news out of China. New-York indexes are at multi-month highs and just shy of multi-year highs following the recent run-up in prices. For the four-day period, the Dow added 69 pts. to end Thursday at 13,165, the S&P 500 advanced 12 pts. to close at 1,402 and the Nasdaq moved 67 pts. higher to 3,018.

Our Recommendation

 Longer term investors should be buying equities selectively

·       Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Our over-riding message has not changed over the last several weeks:  although it’s easy to point to the many negative macro-economic and geo-political factors which cast a shadow over the market, most are not new, and are largely priced in to stock valuations.”

·       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 terms of TSX sector strategy, rising U.S. yields should lead to outperformance from Resources, Industrials, and Lifecos, with Telecom, Banks, Staples, REITs, and Utilities lagging.”