Fresh evidence that the US economy is stronger than previously thought pushed worries aside about a global slowdown this week. On Thursday, the US Commerce department said Gross Domestic Product – the broadest measure of goods and services produced by an economy – expanded at a 3.5% annual rate in Q3. Quarterly US GDP data has been hot and cold this year – Q1 figures contracted over the harsh winter while Q2 showed brisk growth – so a second, positive sign was welcome news. Meantime, the Fed said Wednesday at the conclusion of its two-day meeting that it would stop – as expected – its long-running bond-buying. It also said it saw “sufficiently underlying strength in the broader economy” as if to presage the GDP data release. Adding to the positive sentiment south of the border were continued positive earnings announcements and economic data that underwhelmed but did not entirely disappoint. Overall, the developments in the US took the spotlights off the Chinese and euro zone economies which have been the focus of concern over the past several weeks. In the euro zone, the ECB announced Monday that all but 13 banks passed stress tests which means they have enough capital to survive. And finally, Brazilians sold off stocks and currency to start the week after its president was re-elected heightening concerns the world’s seventh largest economy will continue to stagnate.
American markets roar
US markets roared this week with stock benchmarks once again nearing record territory. For the four-day period covered in this report, the Dow added 390 pts. to finish at 17,195, the S&P 500 jumped 30 pts. to close at 1,994 and the Nasdaq moved ahead 83 pts. to end at 4,566. In Canada, the TSX went the other direction shedding 85 pts. to end Thursday’s session at 14,458.
Higher volatility returns
Fixed Income: Andrew Mystic, Director, Portfolio Advisory Group wrote: “There remain a number of risks that continue to overhang markets and could keep rates holding in lower for longer. Growth concerns in Europe and China, geopolitical risks, deflation concerns, the Ebola crisis and divergent central bank policy trajectories are all conspiring to spark volatility and lead to a short-term flight to safety. Comments from Fed officials last week, both direct and indirect, have sparked market speculation that another round of QE may be on the horizon. We remain of the view that the threshold for further QE remains very high (barring a crisis event) – as the impact of Fed-speak alone will likely be sufficient to soothe market fears. Many of the risks on our current radar remain manageable, in our view. We continue to believe investors should migrate towards higher quality credit exposures. We remain cautious on high-yield at the moment as we are seeing liquidity in the sector become increasingly challenging. Some modest term extension makes sense to us. In our more actively managed bond portfolio we are currently targeting a duration of four years (up from about three years). We would however continue to advise that investors remain cautious, particularly as we approach the December FOMC policy meeting, where Fed rate guidance could spark interest rate volatility.”
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.”