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Market Review

Third quarter 2012

 

Fixed income

The big news in bond markets this quarter was continued low short-term interest rates, coupled with the Federal Reserve’s announcement of another round of asset purchases, designed to further bring down medium term interest rates. Mere suspicion that a third round of quantitative easing (QE3) was in the works was enough to help push up all major asset classes, not just in the United States, but in other markets too, including Canada.

 

US monetary authorities appear to have been coordinating their moves with those of other Western central banks, notably in Europe (which has been inching towards increasingly formal commitments to bail out troubled member states), the UK and Japan. Canada has made out well on that front. The country’s strong resource base, banking system and relative fiscal stability, make the country a continued beneficiary in the “flight to quality” by skittish investors.

 

As a result, Canadian bonds have been doings quite well, especially corporate issues. Two, five and ten year treasury issues also did well closing the quarter yielding 1.07%, 1.31% and 1.74% respectively.

 

Equities

 

Canadian markets

Canadian stocks also had an excellent quarter, rising 6.25% during the period on low volumes, more than enough to wipe out losses from the first six months of 2012. The benchmark S&P/TSX ended Q3 in positive territory for the so far up 3.0%.

 

The index’s performance was sparked in large part by the frenetic money printing by global central banks, which had a considerable effect in resource rich countries such as Canada and Australia, as it forced international investors to look for inflation hedges. Continued steady corporate profits also contributed to the rise as did the Canadian labour market, which pumped out new jobs steadily throughout the quarter.

 

US markets

US stocks rose by 5.8% in local dollar terms during the quarter, boosted by Fed’ money printing, and a gradually improving jobs picture (the US unemployment rate fell to 7.8% in September, the first time in more than two years that it has fallen below 8%). This added significantly to an exceptionally strong performance since January (+14.6%, in local dollar terms, year-to-date).

 

Election years are traditionally quite bullish for US equities. However the aftermath looks is less promising, due to massive tax increases and spending cuts projected in the Congressional “fiscal cliff,” agreement reached earlier this year, which politicians are now trying to back out of.

 

Foreign markets 

European stocks were big winners this quarter, sparked in large part by easing worries about the potential fallout effects sovereign debts, stemming from ECB reassurances in the matter.

European economic growth data, which were less bad than expected, also helped, though the continent continues to suffer considerable difficulties.

 

The CAC (Paris), DAX (Frankfurt) and FTSE (London) all gained ground, rising 4.9%, 12.5% and 3.1% respectively in local currency terms. Japanese stocks for their part struggled during the quarter, in large part due to sluggishness in China, the country’s largest trading partner, though they remain well in positive territory for the year as a whole (+4.91% in local currency).

 

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