Summer 2010 The Sequel: Summer 2011?

Global equity and bond markets pretty much finished the month of March where they started, which is not to say that the month was uneventful. March of 2011 will be remembered for the massive earthquake, tsunami and subsequent nuclear accident which struck Japan mid-month. As if the crisis in Japan didn’t add enough uncertainty, the situation in the Middle East continued to deteriorate with Western nations joining forces to launch air strikes against Libya. Markets reacted in kneejerk fashion, as equity markets declined over 5% within a few trading sessions then turned on a dime and reversed all of the losses by month end. The TSX dropped 0.1% even as oil rallied a further 10% to almost US$107 per barrel and gold climbed another 2%. The S&P 500 ended March down 0.1% in U.S. dollar terms but down 0.3% in Canadian dollars as the loonie continued its climb to 3 cents above parity relative to the greenback. In Europe, any concern over an imminent bailout of Portugal appeared to be more than offset by growing conviction that the European Central Bank would begin raising interest rates in April (which they eventually did this past week). As a result, the Euro continued to rise against the U.S. dollar, passing through the $1.40 level to close the month at US$1.42. Finally, the bond market played out in opposite fashion to equity markets, with prices climbing and yields dropping as the crisis unfolded then reversing back again once equity markets got back on a roll. Credit spreads finished the month slightly wider as the market absorbed an elevated amount of new issuance through March.

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The Trend is Your Friend…But for How Much Longer?

Equity markets picked up where they left off in December as major averages continued to power higher through the month of January. The S&P 500 climbed 2.3% in U.S. dollar terms last month and is up about 20% since January of 2010. The Canadian equity market had a more modest start to 2011, climbing “just” 0.8%, although the TSX is now up over 22% from last year. Gold certainly didn’t help the Canadian equity market as the price of bullion slid by just over 6% to US$1,333 per ounce on the back of a stronger U.S. dollar, and a fledgling view that stronger U.S. growth could mean less quantitative easing from the Federal Reserve (possible, but in our view not likely). The Canadian dollar fell slightly against the Greenback, dropping 0.3% last month, but continues to be among the very best performing global currencies relative to the U.S. dollar. The price of oil remained relatively flat, holding above the US$90 level on concerns recent tensions in Egypt could prove destabilizing in the Middle East and threaten the supply of oil out of the region.

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