Dumb and Dumber

Global financial markets continue to undergo wild gyrations as politicians on both sides of the Atlantic appear intent on doing their very best to make bad situations in the E.U and U.S. even worse.As to which group is “Dumb” and which is “Dumber”, I’ll leave it up to you to decide . In my opinion, it is pretty much a dead heat between the two. The U.S. debt debate is playing out (at least so far) pretty much as we expected. The first deadline for agreeing to raise the debt ceiling back in May was ignored, causing the U.S. Treasury to come up with some account juggling in order to extend the timeline for an agreement to August 2nd, 2011. Incredibly, with only 2 weeks to go until the Government of the United States is forced to start choosing which bills not to pay, both parties are sticking to their ideological ground and remain almost as far apart as when they started negotiations 4 months ago. That, in our view, is just plain dumb. Meanwhile in Europe, markets have now waited over 18 months to hear how the EU will deal with the obvious insolvency of an EU member state – Greece. While the politicians have bickered and dithered for more than a year over how to handle the grass fire on the back lawn (Greece), the front lawn (Portugal), garage (Spain) and now the main house (Italy) have all caught fire. This in our opinion was also pretty dumb, and unless the U.S. surprises us, will probably ultimately be viewed as actually being even “Dumber” than what has occurred in Washington.

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Even Better than the Real Thing?

Markets finally took notice last month of the myriad of risk factors which have been looming on the investment horizon and reacted in a predictable fashion: equity markets and bond yields declined while the U.S. dollar strengthened. The S&P 500 dropped by 1.4% last month but actually climbed 1% in Canadian dollar terms as the U.S. dollar strengthened by almost 2.5% relative to the Canadian dollar. The U.S. equity market finished May up about 7% so far this year in U.S. dollar terms but up only 3.8% for 2011 when measured in Canadian dollars. The Canadian Equity market was led lower by a substantial decline in the price of crude oil (down 10% during May) and dropped for a third consecutive month, falling a further 1% from its April close. May’s decline lowered the year to date return for the TSX index to 2.7%. The stronger U.S. dollar translated into a lower gold price last month (down 1.7%); although the yellow metal is still up over 8% from where it started 2011.

The Usual Suspects

Global markets were fairly mixed over the course of April as the U.S. dollar continued to lose ground against most other currencies. The U.S. equity market had another good month in U.S. dollar terms (the S&P 500 was up 2.8% for April) but was only mildly positive in Canadian dollars (up just 0.3%) as the loonie rallied a further 2.5% relative to the U.S. dollar. The Canadian equity market declined for the second month in a row, dropping 1.2% in April following the modest 0.1% drop in March. The Canadian market was pulled lower by its three largest groups: Financials, Energy and Materials – all of which declined in April. Energy was particularly interesting as the price of oil climbed over 6%, while oil exploration and production stocks fell. Fortunately, we have positioned the energy holdings of our clients’ capital appreciation accounts much more heavily toward energy service stocks, which gained in value during April.

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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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