Market Watch - Weekly Newsletter

Market Watch

The big picture
Surprise increase in pending home sales fuels optimism

The U.S. Treasury Department will be bringing back the seven-year note and doubling the number of its 30-year bond auctions to help finance a national deficit that some believe will exceed $2 trillion once President Obama’s US$900 billion-plus stimulus package is taken into account. On the bright side, a better-than-expected 6.3% increase in pending home sales provided a hint that the bottom of the U.S. housing market may be closer.

This week the Bank of England cut its key lending rate to 1.00% – the lowest since the bank was founded in 1694. However, the European Central Bank (ECB) announced that it would keep its benchmark rate unchanged at 2.00%. The pause was the ECB's first since October, when its key rate was 4.25%. The ECB, which is the central bank for the 16 countries that use the euro, has been more cautious in cutting rates given the risk associated with stoking inflation by lowering borrowing costs for businesses and consumers – the ECB's sole mandate is to “maintain the euro's purchasing power and thus price stability in the euro area.”

On Friday, Statistics Canada said Canada lost a record 129,000 jobs last month – well ahead of the consensus expectation of 40,000 – as the unemployment rate surged more than half a point to 7.2 per cent. Factories let go 101,000 people last month across the country, as many of the layoff notices announced in recent months were put into effect.

The markets
How would you like to pay for that: Visa or MasterCard?

Shares of MasterCard Inc. and Visa Inc. bucked weakness in the broader U.S. financial sector this week as both companies reported earnings that lacked the troubling trends common in other areas of the U.S. financial services sector. Their exposure to the credit crunch has been somewhat limited given that they make money from processing and transaction fees they charge bank customers.

Meanwhile, it’s clear that retailers are getting increasingly creative in their attempts to woo cash-strapped American consumers. Hyundai recently told new car buyers in the U.S. that they could simply return their cars if they lost their jobs. On Tuesday, Denny's gave away thousands of free Grand Slam breakfasts in a bid to showcase its value-friendly meal options. One of the biggest winners in the midst of the rebirth of thrift remains McDonald’s. The company just announced plans to open 1,000 new stores in 2009.

Our recommendation
Take advantage of compelling opportunities

• Equities. Economic statistics are anticipated to be at their worst over the next several months and Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group suggests that in response to any negative market reactions investors should be selectively building equity positions in quality companies to position portfolios for the next cycle.

• Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, says while the government bond markets in the U.S. and Canada remain volatile, we continue to prefer provincial and municipal bonds, as well as high quality corporate names.

• Portfolio strategy. With volatility still at record highs, it’s important to review the impact on your portfolio allocations and ensure that your holdings remain appropriate for your goals and risk tolerance.