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Market Review

Second quarter 2012


Fixed income

Loose monetary policy by major global central banks continued as the key bond market trend during the second quarter. With policy rates near zero in Europe, the US and Japan, the focus remained on non-traditional methods, particularly bond purchases. Markets continued to push Spanish and Italian borrowing costs up throughout the quarter, a further sign that the Greek crisis is spreading. However at the quarter’s end German acceptance of European proposals to provided liquidity directly to failed Spanish banks provided hope to major investors. 


The uncertainty in Europe and elsewhere pushed considerable foreign capital to the relative safety of US markets. This did not stop Federal Reserve chairman Ben Bernanke from extending its own “Operation Twist” program of buying longer-dated securities and selling shorter dated ones, to push long rates down. China too, which has been losing steam, trimmed its growth projections during the quarter and announced both an interest rate cut and a reduction in reserve requirements.


In Canada the big news was Federal Finance Minister Jim Flaherty’s tightening of mortgage lending requirements to dissuade marginal borrowers. The country’s economy continued to outperform that of other developed nations, though employment growth did slow near the quarter’s end. Flaherty’s hope is that the new initiative will let some air out of the country’s frothy real estate market, which has been fuelled by exceptionally low borrowing costs. The bond market ended the quarter with two, five and ten year rates trading at 1.04%, 1.29% and 1.72% respectively.




Canadian markets

Canadian stocks took a pounding during the quarter due to weakening raw materials prices. The energy sector which comprises a huge chunk of the benchmark index was particularly hard hit. At quarter’s end the S&P/TSX was down by 3.0% since the start of the year.


US markets

US large cap companies, which posted excellent recent growth numbers and have considerable cash on hand, continue to provide a beacon of hope for global investors. Many of these firms have benefitted considerably from a flight to quality by investors which has pushed US equity markets up since the start of the year. The trend abated somewhat during Q2, which proved to be a “risk off” period, due in part to the country’s latest disappointing job numbers. That said, the benchmark S&P 500 continues to be up by 8.31% since the start of the year in local dollar terms. The tech-heavy NASDAQ in particular has been performing well, led by Apple, whose stock has been on fire.


Foreign markets 

European stocks held up relatively well during Q2, despite sovereign debt worries and other global concerns. The CAC, DAX and FTSE were all down during the quarter, but all have gained ground since the start of the year in local currency terms, led by the Frankfurt DAX which advanced by 5.61%. Japan lost ground during Q2 largely due to reduced demand from Europe as well as sluggishness in its other major trading partners, notably China and the US. During flights to quality many Japanese investors tend to repatriate cash, which in turn pushes up the yen’s value, hurting the country’s trade position.


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