May 5, 2012
A slight correction…
Major global markets have registered decent gains since the start of the year. However, in recent weeks, as it often happens during run-ups, profit takers emerged to take advantage of the trend. This, combined with a slew of uneven or weak economic data, sent equities into correction territory.
Eurozone stocks were particularly hit due to considerable uncertainty regarding the run-up to the French presidential elections. Positive poll numbers for socialist candidate and eventually winner Francois Hollande (who has promised to tone down austerity and a 75% tax on high income earners) cooled market enthusiasm considerably in both France and Germany. Although sovereign debt concerns had abated somewhat in the wake of a temporary settlement of the Greek debt crisis, new worries, this time related to Spain, surfaced during the month.
US stocks traded sideways during April, despite positive earnings numbers from large corporations (with many firms beating expectations), particularly Apple, which continues to set profitability and market capitalization records. That said, markets overlooked the good news and focused instead on poor housing, employment and other data.
Even China, which many observers fear could be facing a stronger slowdown than what had been expected, was not immune to rougher times. Chinese banking officials reacted by bringing down bank reserve requirements (which they had previously raised) back to previous levels.
Canada was in many ways an outlier, announcing the creation of an impressive 82,000 jobs in March, and continued strong (though weakening) housing sector data. This, coupled with fears about household debt and rising condo prices in the Toronto market, gave the Bank of Canada the confidence to hint by mid-month that a pullback of some of its considerable monetary stimulus (i.e an increase in interest rates) may be in the cards.
Bond markets reacted quick by pushing up yields, particularly along the short end of the curve. Stocks reacted to the move and to worries about reduced Chinese demand for Canadian raw materials, by pushing down equity prices, moving the country’s stock market in negative territory.
The good news for investors is that corrections are a normal part of market cycles and there are few indications that this one will be any different, particularly here, in Canada where the fundamentals continue to look good. If things play out that way again, the upwards movement in equities prices would be expected to resume its course in the coming weeks and months.
© 2012, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998
Peter Diekmeyer Communications Inc.