Big Picture
Stocks on cruise control
Global markets continued to march higher amid a relatively quiet but upbeat week for news and economic releases.
Once again it was jobs data from south of the border that helped fuel positive sentiment and bring out the buyers as stronger-than-expected labour figures were released Thursday. The figures showed a drop in the number of jobless claims last week with the number coming in at 323,000 versus an expected rise to 335,000. The 323,000 figure stands as the lowest in five years which added to the buoyant tone set last Friday after a much stronger-then-expected payroll report was released. Since then, major benchmarks in the US have set records as has the German DAX and Japanese Nikkei. Adding to the positive backdrop was trade data out of China on Tuesday that helped ease concerns over slumping economic growth in the PRC. The country posted a trade surplus of $US18.16 billion in April versus expectations of $US15.55 billion with export growth coming in at 14.7% and import growth at 16.8%. Both figures exceeded forecasts which helped inspire a mini commodities rally. The sector participated in the move up this week; a welcome sign that the current surge may be broadening to less defensive areas of the market. Looking ahead, Fed Chairman Bernanke speaks this morning (May 10) and the market will, as always, parse his words to try to get a read on future stimulus moves.
Global Market Update
New highs and fresh records for New York
The Dow and S&P 500 made headlines this week with both reaching all-time highs and the Dow clearing the 15,000 pt. hurdle Tuesday. For the four-day period, the Dow rose 109 pts. to end Thursday at 15,082, the S&P 500 rose 12 pts. to finish at 1,626 and the Nasdaq advanced 31pts. to close at 3,409. In Canada, the S&P/TSX also notched a high on the week – albeit one that’s only about a month old but a high nonetheless – as the benchmark gained 105 pts. to end at 12,543.
Our Recommendation
U.S. equities approaching fair value; Sector rotation could be next major theme
Big Picture: Global Stock Markets
Central bankers lift sentiment, markets
It was a bumpy week for most major equity markets but they were able to advance through Thursday thanks to central bankers’ actions in Europe and south of the border.
In Europe, the ECB did what it hadn’t done for 10 months – cut interest rates. The benchmark rate for the 17-member eurozone now stands at .5% after the central bank cut by 25 bps., or a quarter of a percentage point. The move, which had been expected and is largely symbolic, helped turn sentiment and markets around after Wednesday’s triple-digit losses. The rate cut came one day after lower levels of manufacturing were announced in the US and China; the primary cause of Wednesday’s slide. In the PRC, a purchasing managers index fell to 50.6 in April from 50.9 in March indicating a slowdown in manufacturing activity while ISM data out of the US also pointed to decelerating manufacturing south of the border. The disappointing read on US manufacturing was tempered by the Fed’s announcement to adjust bond purchases – increasing or decreasing – depending on job market and inflation data. Separately, the Canadian economy performed better than expected as GDP grew .3% in February topping expectations for .2%, which translates into 1.7% annualized growth. And finally, the Bank of Canada announced late Thursday that Stephen Poloz will replace Mark Carney as Governor. Look to US payroll numbers to be a potential market mover today (May 3) after their release Friday morning.
Markets
Bay, Wall Streets gain
North American markets ended the four-day period solidly higher with the TSX leading the way points-wise with 146 pts. gain to close Thursday at 12,379. New York also posted solid gains with the Dow rising 109 pts. to finish at 14,831, the S&P 500 advanced 14 pts. to end at 1,597 while the Nasdaq jumped 57 pts. to end at 3,340.
Our Recommendation
Time for a breather; Recommend modest temporary reduction in equity exposure
The admission by a euro official that austerity policy no longer had public support was enough to revive global stock markets this week.
The European Commission President made the announcement Monday based on figures that showed euro countries with the most aggressive austerity programs were having the least success cutting deficits. News of a potential policy shift was cheered by investors who drove global indexes sharply higher through Thursday. Eyes now turn to next week’s ECB meeting where a potential interest rate cut or something more may be in the offing. Adding to the positive backdrop to stocks was news that the UK had narrowly avoided a triple-dip recession as Q1 GDP came in at .3%. Turning to the US it was a mixed bag in terms of economic data and earnings announcements. Durable goods orders – a useful gauge to determine future growth – disappointed as orders fell 5.7% in March; a decline of 2.9% was expected. In contrast, jobless claims dropped to a five-year low Thursday as the number of Americans applying for benefits declined by 16,000 to a seasonally adjusted 339,000. Meantime, US PMI data came in at 52 for April; not great but acceptable as anything above 50 indicates expansion. German PMI, on the other hand, dipped below the 50 level to 48.8. Look for US Q1 GDP figures today (April 26).
Big Picture
Global Stock Markets slump on growth fears
It was a tough week for global stock markets around with many registering their biggest point declines in months.
The trigger lay in re-ignited fears over slowing global growth in two of the world’s three economic engines. On Monday, China surprised with weaker GDP growth than expected as the country grew 7.7% year-over-year in the first quarter down from 7.9% in the fourth quarter. Decelerating industrial output in China also disappointed investors who turned to the sell button in response. Word the IMF was cutting its global economic forecast for growth added to the worries as did leading economic indicators south of the border which came in below expectations on Thursday. The March Philadelphia Fed Survey’s general business conditions index came in at 1.3, far below the 3.3 reading economists had forecast. Earlier in the week, the New York Fed’s Empire State index of manufacturing activity also slipped more than expected. Meantime, lacklustre earnings south of the border had investors on the defensive as top-line results have been uninspiring even if bottom-line numbers are beating. Of the S&P 500 stocks that have reported first-quarter results to end of day Wednesday, 71% have beaten analysts’ predictions on earnings but only 52% have done it on sales.
Markets
US and Canadian markets register sharp losses
Major indexes north and south of the border lost ground with the pain a little more acute in Canada as the commodity complex took it on the chin. This was particularly true of gold which notched its biggest one-day price decline in 30 years on Monday; oil prices also retreated. For the four-day period, the TSX shed 341pts. to end Thursday at 11,996. South of the border, the Dow fell 328 pts. to close at 14,537, the S&P 500 gave back 47 pts. to finish at 1,541and Nasdaq lost 128 pts. to close at 3,166.
Our Recommendation
Headline economic indicators moderate; looking to Q1 corporate earnings as next catalyst
* Equities.Himalaya Jain, Director, PAG, wrote “Although we are maintaining our preference for equities, our near-term enthusiasm is being tested by weaker than expected economic indicators. Some of the weakness could be temporary (U.S.), while some may have longer duration than we initially anticipated (Europe). China’s growth demands close monitoring, but we remain of the view that its growth should accelerate toward year-end. Although U.S. corporate earnings are off to a good start, we are raising our caution level one notch as we expect equity market returns to be modest over the next two to four months. We expect Canada to continue underperforming until the dual overhang of a cooling housing market and weak commodity environment clears.”
* Fixed Income. Andy Mystic, Director, PAG, wrote: “Following the disappointing March non-farm payrolls and this week’s sell-off in gold, US 10-year treasuries have fallen below their 200-day moving average and into a new trading range – with US 10-years now trading around 1.72%. We think it makes sense to evaluate fixed income exposure as to weighting and duration as the next logical strategic asset mix shift being a reduction of fixed income holdings and shortening of portfolio duration”
* Preferred.Tara Quinn, Director, PAG, wrote: “For the second week in a row the preferred share market started to retreat slightly as spreads on non-investment securities widened. Our recommendation in this environment continues to be focused on investment grade securities which provide an attractive dividend to holders. The floating rate sector of the market also looks attractive. Although we are not expecting a large move in the short end of the yield curve in the near term, we are expecting higher rates in the future and the floating rate sector should perform well in a rising interest rate environment.”