Market Watch

The big picture

Global economy stabilizing


Finance ministers from the G8 countries agreed over the weekend that the global economy was showing encouraging signs of stabilization. This week, the Bank of Japan held its interest rate at 0.1% and upgraded its economic assessment for the second straight month, on rising exports and output. The Reserve Bank of Australia also refrained from cutting interest rates, given signs of stabilization at home and abroad, noting in particular a strong recovery in Chinese industrial production.



In Washington, U.S. President Barack Obama unveiled a proposal for sweeping reforms to bank and market regulation. The plan urges stronger consumer and investor protection, and includes new policing powers for the Federal Reserve and government, and higher capital and liquidity requirements for financial firms. Consumer prices in the U.S. rose just 0.1% in May from April, quelling fears that inflation would threaten economic recovery. Meanwhile, the total number of Americans on the unemployment insurance rolls dropped for the first time since early January. In Canada, the outlook for the economy continued to improve, based on Statistics Canada’s leading indicator index, which slowed sharply in May to just 0.1%, marking the smallest of nine consecutive declines.



The markets

TSX gives up some gains as commodities pull back



Although the TSX is still up nearly 40% since March 9, falling commodity prices sent the resource-heavy index into a broad-based retreat early this week. Meanwhile, the Canadian dollar fell to a four-week low against the U.S. dollar as the price of oil and metals weakened, and global equities slid on doubts about the strength of an economic recovery. U.S. stocks sagged as some investors unwound trades betting on quick economic recovery.



Markets reacted to a disappointing earnings announcement by FedEx, as the company’s business levels are seen as a gauge of the economy’s strength. Research in Motion Ltd. (RIM) announced better-than-expected earnings on Thursday, but offered an outlook that fell short of some expectations, causing its shares to slide 5%. While RIM’s new BlackBerry Tour is slated to launch mid-July, Apple’s new iPhone 3G S launched today – sales could top 500,000 in the first weekend given consumers’ growing appetite for advanced smart phones.



Our recommendation
Favour shorter-maturity bonds as yields set to rise



· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, believes that trading volume has declined recently suggesting the current rally is losing steam and at best may move sideways for a while in a period of consolidation, or indeed give back some of the recent gains. Investors may be motivated to take profits based on the conclusion that stocks have in fact moved too far too fast and have few pending catalysts to generate further gains until Q2 earnings season commences in late July.

· Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, highlights that with Scotia Economics recently changing their forecast, calling for rising yields across the entire maturity curve in 12 months time, active traders should remain in shorter-maturity bonds. Clients should consider taking profits on subordinate Canadian bank bonds such as Tier 1 Capital Securities, as many are up more than 20% in value since December. Corporate spreads have narrowed significantly since the beginning of the year, due to investor risk appetite returning. As such, we see better relative value in municipal bonds where spreads have not declined to the same degree.

· Portfolio strategy. With significant volatility still a factor in the markets, it’s important to review the impact on your portfolio allocations and ensure that your holdings remain appropriate for your goals and risk tolerance.

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