Geopolitical risk remains at the fore; Fluid situation in Ukraine suggests need for vigilance
The S&P500 remains close to a record level as better than expected February jobs data in the U.S. offset ongoing uncertainty over the situation in Ukraine. Russia said its cash-strapped neighbor must pay off almost US$2 billion owed to Russia for natural gas by today and signaled it may cut supplies, ratcheting up the pressure as the two nations scrap over the future of the Black Sea Crimea region. The U.S., meanwhile, sent six F-15 fighter jets to Lithuania, will dispatch 12 additional F-16s to Poland, and sent the guided-missile destroyer USS Truxtun into the Black Sea in what it called a routine visit unrelated to events in Ukraine. We remain concerned about the situation’s potential impact on global investor risk appetite and the fragile economic recovery currently underway in Europe. A plan by Western nations to isolate Russia diplomatically and maybe economically means most commodities are likely to remain well bid until the crisis subsides. Considering that Canadian and U.S. equity markets remain close to the top end of a technical range and fairly valued fundamentally, we continue to recommend maintaining higher than average cash positions.
Equity markets recover, bonds sell off, and commodities mixed
At the time of writing the S&P500 was +0.8% over the week after a Tuesday rebound reversed a Monday sell-off, while U.S. 10-year Treasury yields increased approximately 14 bps to 2.79%. The S&P/TSX posted a +0.6% return and Canada 10-year government bond yields increased approximately 10 bps to 2.53%, while the Nasdaq added +0.7%. On the commodities front, WTI advanced US$0.22/bbl over the week to US$102.81, copper declined 3% after China’s first onshore default sparked worries rising debt will curb demand, natural gas was roughly flat, and gold gained less than 1% after falling back from north of US$1350/oz on Monday as a safe-haven trade.
Geopolitical risk leaves us cautious
Equities. Warren Hastings, Associate Director, Portfolio Advisory Group wrote: “Earlier in the week, the S&P500 moved higher into record territory after Russian President Vladimir Putin instructed 150,000 troops to end military exercises near the Ukrainian border and return back to base. Although it appears that an armed conflict has been averted in Ukraine (for now?), we think the temperature in the region has only been turned down a small notch. So long as Russian troops occupy critical infrastructure in Crimea and Putin maintains an aggressive stance, we think the celebratory mood of equity markets may be premature. Indeed as noted above, on Friday, Russia ramped up the rhetoric with Ukraine over amounts due for natural gas, while the U.S. deployed aircraft and a naval destroyer close to the region. We continue to recommend higher than average cash positions.”
Fixed Income. Andrew Mystic, Director, Portfolio Advisory Group wrote: “A few key factors have conspired to keep rate markets relatively well bid over the past week including (1) The suggestion by Fed Chair Yellen that the Fed needed to get a firmer handle on exactly how much of the recent softer data could be explained by weather related considerations – raising the possibility that some of the softness could be resulting from a below trend outlook. As well, Yellen did open the door, albeit slightly, to the prospect of a pause in tapering. (2) Geo-political risks stemming from the Russian-Ukrainian crisis. The underlying geo-political impact likely poses the greater risk as the compromised relationship between Russia and the West could drag on global growth – potentially in the form of slowing German exports and rising energy costs. (3) Within this context, the crisis in Ukraine has once again raised the prospect of EM volatility. Although the U.S. recovery still has the capacity to gain traction as weather related concerns abate, the risks highlighted above likely keep rates somewhat contained in the near term, in our view. We would look at rate sell-offs (e.g. if the U.S. 10-year Treasury were trading around the 2.85% level) as an opportunity to take on a tactical rate trade. We continue to be of the view that rates in the back half of 2014 may be more vulnerable – barring an escalation of recent geo-political risks and assuming the resumption of better trending U.S. data, once weather related distortions have dissipated.”
A registered disability savings plan (RDSP) is a savings plan that is intended to help parents and others save for the long term financial security of a person who is eligible for the disability tax credit.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included in income for the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant, the Canada disability savings bond, investment income earned in the plan, and rollover amounts are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.
You can designate an individual as beneficiary if the individual:
* is eligible for the disability tax credit (DTC);
* has a valid social insurance number (SIN);
* is a resident in Canada when the plan is entered into; and
* is under the age of 60 (a plan can be opened for an individual until the end of the year in which they turn 59).The age limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.
A beneficiary can only have one RDSP at any given time, although this RDSP can have several plan holders throughout its existence, and it can have more than one plan holder at any given time.
A Canada disability savings grant (grant) is an amount that the Government of Canada contributes to an RDSP. The Government will pay matching grants of 300, 200, or 100 percent, depending on the beneficiary’s family income and the amount contributed. The beneficiary’s family income is calculated as follows:
* From birth to December 31 of the year the beneficiary turns 18, the beneficiary’s family income is based on the income information used to determine the Canada child tax benefit (CCTB) for that beneficiary.
* Beginning the year the beneficiary turns 19 until the RDSP is closed, the beneficiary’s family income is based on his or her income plus his or her spouse’s, or common-law partner’s income. To qualify for the bond or to earn a grant, the beneficiary must file income tax returns for the past two years and all future taxation years when he or she has an RDSP.
* If the beneficiary is under the care of a department, agency, or institution for at least one month in the year, the grant is based on the allowance payable to the department, agency, or institution under the Children’s Special Allowances Act.
An RDSP can get a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. A grant can be paid into an RDSP on contributions made to the beneficiary’s RDSP until December 31 of the year the beneficiary turns 49. The amount of the grant is based on the beneficiary’s family income. The beneficiary family income thresholds are indexed each year to inflation.
The income thresholds for 2013 are as follows:
Amount of CDSG grant when family income is $87,123 or less:
* on the first $500 contribution—$3 grant for every dollar contributed, up to $1,500 a year.
* on the next $1,000 contribution—$2 grant for every dollar contributed, up to $2,000 a year.
Amount of CDSG grant when family income is more than $87,123:
* on the first $1,000 contribution—$1 grant for every dollar contributed, up to $1,000.
A Canada disability savings bond (bond) is an amount paid by the Government of Canada directly into an RDSP. The Government will pay bonds of up to $1,000 a year to low-income Canadians with disabilities. No contributions have to be made to get the bond. The lifetime bond limit is $20,000. A bond can be paid into an RDSP until the year in which the beneficiary turns 49.
The amount of the bond is based on the beneficiary’s family income. The beneficiary family income thresholds are indexed each year to inflation.
The income thresholds for 2013 are as follows:
* $25,356 or less (or if the holder is a public institution), the bond is $1,000;
* between $25,356 and $43,561, part of the $1,000 is based on the formula in the Canada Disability Savings Act;
* more than $43,561, no bond is paid.
Since 2011, you can carry forward unused grant and bond entitlements to future years. The carry forward period can only start after 2007 and lasts for 10 years. Grants and bonds will be paid on unused entitlements up to an annual maximum of $10,500 for grants and $11,000 for bonds. Opening a RDSP in 2014, can qualify for immediate $7,000 grant, without adding any contribution of your own.(conditions apply).
Employment and Social Development Canada (ESDC) administers the Canada disability savings grant and the Canada disability savings bond programs. ESDC bases the amount of the grants and bonds that are available for any particular year on the beneficiary’s family income for that year, as well as on matching rates.
More info: http://www.cra-arc.gc.ca/rdsp/
US Fed calms markets
Comments from US Federal Reserve Chairwoman Janet Yellen helped deflate mounting concern this week over Ukraine tensions and soft US economic data. Yellen said the Fed may consider a tapering pause if economic conditions warrant it. That brought relief to some investors who’ve become increasingly concerned over the pace and timing of tapering in the face of deteriorating economic signals; signals that continued to flash red and green this week. Durable goods numbers did, for instance, surprise on the upside falling 1% versus an anticipated 2% but consumer confidence fell more than expected. The confidence gauge dropped to 78.1 from a revised 79.4 in January; a measure of 80.1 was expected by economists. The unevenness continued with sales of single family homes surging to a five-and-a-half-year high while initial claims for jobless benefits rose. Acknowledging the mixed bag of data, Yellen said she was unsure how much of it stemmed from adverse weather and would wait to find out before making any policy moves. Yellen’s comments also helped assuage European markets which grew increasingly jittery over developments in Crimea. Its parliament was taken and the Russian flag raised while Russian combat jets were placed on high alert. Looking ahead, we have a US GDP release today (February 28) and as market watchers know, the all-important jobs numbers the first Friday of the new month – March 7.
TSX out front
With only one trading day left in the month it appears safe to conclude February was a good one for equity investors. Most US benchmarks recouped January losses and the TSX continued to churn higher and is, in fact, leading major North American indexes. Year-to-date, the Dow is down 1.83%, the S&P 500 is up .32% and the Nasdaq is up 3.41%. In comparison, the TSX is 4.35% higher ytd. For the four-day period covered in this report, the Dow moved higher by 169 pts. to finish at 16,272, the S&P 500 added 18 pts. to notch a new record close at 1,854, the Nasdaq advanced 55 pts. to end Thursday at 4,318 and the TSX gained 9 pts. to settle at 14,214.
It’s all about the banks this week
Equities. Himalaya Jain, Director, Portfolio Advisory Group wrote “The Canadian banks began reporting this week and while all those who have reported thus far have reported mid-single digit earnings growth, the multiple expansion that the group enjoyed in 2013 (from a low of 9.8x forward P/E in June to 11.5x at the end of 2013) will likely be harder to come by this year. As P/E expansion slows (or even stalls) there will be renewed focus on which banks can grow earnings at an above average rate. After delivering a 16.7% total return over the past 12 months, the bank group may take a breather as P/E multiples have bounced back from “cheap” levels to “reasonable” ones. Between earnings growth and dividends we expect the Canadian bank group to deliver total returns in the 8-10% range for the year ahead. BNS is the only remaining big six bank to report (will report next Tuesday) and the question on everyone’s mind is how the international segment did, particularly in the context of recent headlines on emerging markets.”
Preferred Shares. Tara Quinn, Director, Portfolio Advisory Group wrote “So far in 2014 preferred share markets have experienced roughly $750 million in redemptions and approximately $1.9 billion in new issuance. Markets have soaked up the influx of new product in anticipation of another $1 billion that is scheduled to be redeemed before the end of February. However, with the S&P/TSX Preferred Share Index trading relatively flat on the year it appears that investors are becoming more selective when it comes to new issue product. We anticipate this trend will continue in the near-term as investors become more discerning amid increased market uncertainty.”
Discouraging data grows
The economic news wasn’t great this week but it didn’t seem to bother most major equity markets. South of the border, US Federal Reserve minutes released Wednesday reveal a less supportive Fed than many expected when it comes to economic stimulus. The minutes – taken from the January 27-28 meetings – exposed debate among Fed officials as to when to start raising interest rates. Interest rates are one of two tools the Fed has been using to stimulate the US economy. The second tool – a monthly bond- buying program – has been scaled back, or tapered, over the last two months without any mention of interest rates. The fact that interest rates have entered the conversation took the markets by surprise mid-week as did more discouraging data. Poor home construction numbers Wednesday were the latest to be added to a string of disappointments including weak retail sales figures and scuffling jobs numbers. But equity markets have selectively shrugged off the less-than-inspiring data; cold weather and snow getting the blame. And only when the news is good, such as Thursday’s US manufacturing activity (it hit a four-year high), does the focus shift to fundamentals. Meantime, in China there was more evidence of its economy slowing with a preliminary manufacturing gauge coming in at its lowest point in seven months. And earlier in the week, Japan announced its economy grew at an annualized rate of 1% in the final quarter 2014; a higher number had been expected. In reaction to the disappointing growth figure, the BOJ increased incentives to spur bank lending Tuesday by expanding two programs in which it offers rock-bottom interest rates to commercial banks while lengthening the duration of loans.
Stocks show determination
The TSX was the outperformer over the holiday-shortened week through Thursday. For the three days covered in this report, the TSX was up 156 pts. to close at 14,210, the Dow fell 21 pts. to finish at 16,133, the S&P 500 gained a single point to close at 1,839 and the Nasdaq moved ahead by 23 to settle at 4,267.
Equities, bonds, and gold have all rallied under the guise of bad weather; the imposter(s) will be outed once the flowers bloom
Equities. Himalaya Jain, Director, Portfolio Advisory Group wrote “Defying logic, equities, bonds and gold have all rallied in recent weeks on the same set of economic data. Equities, which typically require an optimistic predisposition, have bought into the notion that weak recent economic data points are almost entirely due to severe winter weather and that underlying US momentum hasn’t been harmed. Bonds and gold have made the opposite interpretation. Heading into the winter, the US and Europe were experiencing steady improvement in key metrics such as employment, consumer sentiment, housing, and PMIs. While we too have become marginally more cautious, we think global economies are still generally improving despite the weather-induced soft patch and expect momentum to return. Should our thesis prove correct then gold and gold equities could experience another down draft. If we are wrong, and the US recovery is truly stagnating, then gold could see further gains as equity markets retreat.”
Fixed income. Andrew Mystic, Director, Portfolio Advisory Group wrote “Bond markets seem to remain directionally uncertain. Although we continue to believe that the US economic trend is likely to turn positive as we move towards Q2/14, doubts have crept into bond market thinking. With the US Congress having reached a budget deal and resolved the debt ceiling issue (at least for the next year) we are more confident that yields will resume an upward trend as the data improves. On the one hand, the latest Fed minutes seem to run in the face of Fed Chair Yellen’s recently dovish comments, by suggesting that US interest rates may have to be raised sooner than previously anticipated. On the other hand, EM global risks continue to linger and likely have the propensity to drive a flight to quality as the Fed unwinds its asset purchase program. With 3.0% on the 10-year Treasury a seemingly difficult resistance point to breach, we would likely look to take advantage of a steepening curve if a convincing sell off emerged. In contrast, if EM risks become elevated and softness in the US data proves to be persistent, we would likely become tactically bullish on bonds.”