September 1st, 2011

Strategy Review

Mission Impossible

The month of September was another month of elevated volatility for global financial markets as credit, currencies, stocks and commodities all reacted wildly to rampant speculation regarding the eventual course of action to be taken in Europe. The Canadian equity market took it on the chin, falling 9% last month as broad weakness in commodities dragged the index lower. Both oil and gold dropped over 11% during the month, driven by fears of a global economic slowdown and the closing of speculative long positions. Equity markets south of the border fared better as the safe haven status of the U.S. created global buying interest in their bonds, stocks and currency. The S&P 500 declined over 7% last month in U.S. dollars, but this was almost entirely offset by a 7% strengthening in the U.S. dollar relative to the Loonie. Not surprisingly, the euro also declined 7%, but remarkably, is actually higher year to date relative to the U.S. dollar by about 3%. Government bond yields in the U.S. and Canada plummeted to new lows,reflecting heightened fears over a new global banking crisis. The 10 year U.S. Treasury fell well below 2%, yielding just 1.8% at one point last month. Corporate bonds fared less well as spreads widened reflecting the dramatic move lower in government bond yields and heightened fears over credit risk from a potential double dip recession.