Worries about the pace of global growth ebbed this week allowing the markets to rebound from previous declines. Hopeful signs of increased stimulus in Europe got the week started on a positive note as rumours spread the ECB may buy corporate bonds in addition to their previously announced decision to buy covered bonds. The covered bond purchases, which started Monday, are part of a package of stimulus measures announced in September. The stimulus rollout and the prospect of additional measures lifted the mood and stocks on the continent mid-week which gave a much-needed boost to market sentiment on the other side of the Atlantic. A string of positive earnings reports out of the US added to the mood as companies in the S&P 500 are now on track to post a 5.3% rise in profit from a year ago according to FactSet. That compares well to expectations for a 4.5% increase before earnings season started. The reassuring earnings news came on the heels of welcome US economic data which came in the form of existing home sales which rose 2.4% in September, jobless claims figures that are near 14-year lows and a consumer price inflation read that rose 0.1% – arguably soft but in the right direction compared to August’s 0.2% decline. Word Thursday that manufacturing activity had picked up in China provided additional relief particularly in light of Chinese Q3 GDP which came in at a somewhat disappointing 7.3%. Although the 7.3% beat expectations it was still below the official target of 7.5%. China has rolled out targeted measures, including increased spending on infrastructure such as railways, energy and public housing. The PBOC has also pumped billions into its banking sector to spur growth. Finally, Bank of Canada Governor Stephen Poloz held steady on interest rates Wednesday after postponing the central banks’ quarterly policy news conference earlier in the day due to the shooting on Parliament Hill.
North American markets rallied from multi-month lows with US benchmarks leading the way. For the four-day period covered in this report, the Dow gained 297 pts. to close at 16,677, the S&P 500 added 64 pts. to finish at 1,950 and the Nasdaq moved ahead by 194 pts. to end at 4,452. The TSX advanced 259 pts. to close Thursday’s session at 14,486.
Higher volatility returns
Equities: Himalaya Jain, Director, Portfolio Advisory Group wrote: “Although we’ve been expecting higher volatility and a pullback, the pace of the recent sell‐off took most by surprise, including us. From our vantage point the ingredients for a 2000‐ or 2008‐style equity market decline are not present. In each of those instances the collapsing of a bubble (technology, housing) triggered an equity market pull back that was soon followed by economic contraction. While we do have concerns about stagnation in Europe, and acknowledge that global growth may not be as strong as it looked at the beginning of 2014, we remain confident that the US economy will continue to show positive momentum. And as a result, we continue to view US equities as attractive, particularly Financials, Technology, Industrials, and Healthcare. In Canada, the pullback in the Energy sector presents an opportunity to high-grade into businesses with conservative balance sheets and better dividend sustainability. We don’t expect oil prices to rebound toward US$100/barrel in the near‐term, but also think that marginal production could begin to be reduced at prices below US$80/barrel. As we’ve been highlighting in recent editions of this publication, investors should continue to brace for above‐average volatility due the plethora of geopolitical and monetary policy risks present, including the upcoming mid‐term US elections on Nov 4. With past scars come important lessons learned: maintain valuation discipline, focus on high quality companies (preferably with attractive sustainable dividends), and stay invested!”
Thoughts on Energy Market Volatility Since hitting a high in mid-June, global oil prices have officially entered a bear market, with U.S. benchmark West Texas Intermediate (WTI) prices down 23% and global Brent prices off 25% (in USD). In terms of Canadian dollar equivalent, WTI is down 19% from the June peak and Brent is down 22%. A relatively bullish crude oil environment has transformed very quickly due to the confluence of increased global supply at a time when global economic growth forecase has been reduced. We share our thoughts on recent volatility and cover six main topics influencing the energy market.
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Worries about weakening global growth and its potential impact on the US economic recovery roiled markets around the globe this week. Europe continues to be the primary source of concern as most economic indicators have turned down since mid-summer. The most recent piece of bad news came Tuesday when Germany – the eurozone’s largest economy – cut its growth outlook for 2014 from 1.8% to 1.2% and reduced its 2015 projection from 2.0% to 1.3%. In addition to paring back German growth estimates, there has been no pick-up in the country’s level of inflation which remained unchanged from August to September at 0.8%. The combination of falling growth and a lack of inflation has plagued much of the eurozone and news that its strongest country may succumb to the same ills rattled traders on both sides of the Atlantic. They’re worried about the impact a decelerating Europe would have on a still scuffling US economy especially in light of halting Chinese growth. A string of poor economic reports out of the US Wednesday added to the down beat mood as retail sales fell, the producer price index disappointed and a business conditions survey dropped. Two positives came Thursday in the form of US jobless benefits claims which came in at a 14-year low and industrial output which sharply rose. The dose of good news seemed to remind traders that the US economy is moving in the right direction and a sense of calm returned to the markets late Thursday. Traders also seemed to notice US Q3 corporate earnings ahead of the weekend which have been pretty decent with 65% of the companies beating estimates thus far.
North American stocks stabilized late in the week following another wild couple of days filled with sharp ups and downs. For the four-day period covered in this report, the Dow fell 418 pts. to close at 16,117, the S&P 500 gave back 43 pts. to close at 1,862 and the Nasdaq shed 63 pts. to finish at 4,217. In Canada, the TSX lost 175 pts. to end Thursday’s session at 14,052.
Higher volatility returns
Equities: Warren Hastings, Associate Director, Portfolio Advisory Group wrote: “The week was characterized by a notable return in volatility. This week, through Thursday’s close, the S&P 500 declined 2.3% in USD terms while the S&P/TSX fell 1.2% (CAD). The declines mirrored a 3.6% decline in crude oil prices following reports Saudi Arabia was considering a volume over price strategy in respect of its oil exports. Equity volatility, as measured by the CBOE Volatility Index, spiked, closing at 26.25 on Oct. 15, the highest since 2012, and the same day the US 10-year Treasury yield declined to 2.14% — a level not seen mid-2013. The sell-off created several attractive buying opportunities in the Canadian equity market, in our view, including select financial, energy producer, and energy infrastructure names.”
Anxiety over the pace of global growth took centre stage this week with the US Fed adding its voice to those worried about a slowdown. The Fed’s concern was articulated in minutes coming from the central bank’s September 16/17 meeting. The minutes identify global growth and the strength of the US dollar as threats to the halting US economic recovery. In light of these new concerns, the Fed says it is more inclined to stick to low interest rates for a ‘considerable’ time. That helped assuage concerns the Fed may raise rates earlier than expected but it also deepened worries about growth. Earlier in the week, the IMF reduced its forecast for global growth citing eurozone weakness and a slowdown in emerging markets. According to the Washington-based IMF, 2014 growth will come in at 3.3% versus an earlier prediction of 3.4% and next year will bring a growth rate of 3.8% compared to a previous estimate of 4%. Adding to the downbeat mood, the head of the ECB said Thursday that monetary policy alone may not be enough to stop the eurozone slide. Meantime, estimates for Chinese growth were revised down by the World Bank for the next three years. What little there was in the way of market-moving economic data came in the form of initial jobless claims south of the border, which came in below forecast. Looking ahead, Q3 US corporate earnings season gets underway in earnest next week while Canadian markets will be closed Monday for Thanksgiving.
Turbulence hits stocks
North American stock markets were volatile much of the week with major benchmarks registering three-digit point swings on several occasions. For the four-day period covered in this report, the Dow fell 351 pts. to close at 16,659, the S&P 500 shed 42 pts. to end at 1,928 and the Nasdaq gave back 114 pts. to settle at 4,378. The TSX also ended the week in negative territory losing 369 pts. to finish at 14,460.
Higher volatility could persist for next several weeks; Rather than panic, we’re looking for opportunities to deploy cash.
Fixed income: Andrew Mystic, Director, Portfolio Advisory Group wrote: “We continue to think that investors should be migrating towards more liquid, higher quality credit – as recent credit pressures are demonstrating. Recent equity weakness, the impact of and threat of M&A activity and geopolitical risks have all conspired to move spreads wider. Although more defensive credit (utilities, pensions) has seen only modest widening, lower grade credit has been impacted more forcefully (retailers, REITs and telcos). Although we generally remain constructive on credit, event risk should continue to persist suggesting individual name selection will continue to be key. We expect that as we approach the Fed’s December meeting the recent bout of volatility could become more acute – which may spur some opportunity. We do however continue to see the impact of geopolitical events weighing on rates and continue to expect a US 10-year around 2.70% by year end.”