April 5, 2012
First quarter, 2012
Interest rates and the bond market
Growing optimism among market participants due to improving economic data in the United States and positive news on the European debt front, helped shift investor interest from fixed income instruments towards equities during the first quarter of 2012. Continued looseness from major world centrals, most of which have been keeping their policy rates at near zero and are suggesting they will keep them there for some time, also put upwards pressure on yields.
The European Central Bank’s Long Term Refinancing Operations (LTRO) in particular, which pumped more than USD $1 trillion into the economy, gave markets an especially bullish signal. The Bank of Canada for its part also contributed, maintaining its policy rate at 1%. These moves combined to push down bond prices throughout the yield curve, with the two, five and ten-year Treasuries yielding 1.2%, 1.6% and 2.17% at the quarter’s end.
Equities prices rose in Canada along with most major developed world markets. The S&P/TSX generated a healthy 3.66% gain during the quarter, closing at 12392.18. The performance was somewhat less than that of major US and European indexes, due in part to weakness in the sluggish, but heavily-weighted resources and materials sectors, which reacted to a downgrade in China’s growth forecasts
That said, market participants were more than satisfied with the gains, which continued steadily throughout the period. Momentum was sustained to the end of the quarter, due to the federal government’s pre-budget initiatives which succeeded in projecting a positive message for the markets. The moderate document did not disappoint, slowing spending growth, and introducing austerity measures such as cuts to growth in provincial transfer payments in outlying years and civil service belt tightening
In the United States the broad indexes showed exceptional growth. The S&P 500 rose by an impressive 12.0% in local dollar terms on the heels of a slew of improving economic data, and the loose global monetary conditions noted above.
Strong job creation numbers, above the 100,000 level for the last few months, pushed down the unemployment rate, and boosted overall optimism - despite the fact that the country’s housing market remains in a considerable funk. Leading the pack has been shares of Apple Computer, which have been pushing up the NASDAQ to levels unseen in years. The laggards have been dividend paying stocks which have underperformed due to strengthening bond yields, which provides investors with increased options for generation steady cash returns.
Markets in Europe and Japan all did well, on the heels of optimism over a possible intermediate solution to the Greek debt crisis and ECB moves to provide additional cash to the continent’s banks. These indexes had all been oversold and in many ways were just looking for a reason to bounce bank. The CAC, DAX and FTSE gained 6.3%, 3.5% and 14.3% respectively in local currency terms, and the Japanese Nikkei 225 advanced by 19.3%.
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Peter Diekmeyer Communications Inc.